Life Insurance Proceeds Not Subject to Debt Collection

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate and Probate Attorney

So you just finished probating the estate of your great Aunt. In the process you find out that you are the beneficiary of her $1,000,000 life insurance policy.  Wow, a big pay day! While you feel bad about the death of your aunt deep down, a part of you is elated (I know, sounds really wrong).  Why, because you are thousands of dollars in debt, and you need to put your children through college.  Your plan is to use a portion of the life insurance proceeds to pay off your debt, while keeping cash on hand to pay for your children’s tuition.  But those debt collectors see that $1,000,000 differently and think “Finally, a chance to collect on my judgment!”  They start demanding the policy, threatening you that they will place a lien on it and take it all for themselves. With these debt collectors breathing down your throat, you don’t know what to do.

Fortunately, New Jersey law gives you the tool to say, “No! (Or in Jersey speak, shove it!) That money is mine.  Your response can be, “If I decide to pay you with that money, that will be my business.” New Jersey law (N.J.S.A.17B:24-6) says if you are a beneficiary of a life insurance policy, you are entitled to the proceeds of that life insurance and creditors cannot come after you for that money to collect the debt. The law says that is permitted.  Now there are some exceptions (of course) and some beneficiaries cannot protect their money under this law.  One of those exceptions is if the beneficiary was the insured and the money is paid to his or her estate.  Another exception is if the person buys a policy on behalf of another and is the policy owner.

There is one other catch-all within the law that allows creditors to go after a life insurance policy.  The law says you cannot take the policy out on another with the intent to defrauding creditors.  Going back to the example above, if you take out a policy knowing you are going into debt and intend to shield your money by paying insurance premiums instead of your debt, then you are in trouble and not going to have the protection of this law.

So the take away of this law is that life insurance proceeds paid upon the death of another are yours and creditors cannot get them.  But try to hide your money in life insurance policies, and the creditors will grab that policy as fast as they can.

To discuss your NJ Estate and Probate matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.