Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, June 27, 2011

Creditors' Rights to Insurance Proceeds in Illinois

Insurance-policy1Illinois laws exempt life insurance proceeds from creditors of the decedent-insured, but a number of exceptions allow creditors a chance to claim these proceeds. The Illinois Insurance Code, at 215 ILCS 5/238(a) (“5/238”) has limited language protecting insurance proceeds from creditors.

5/238(a) exempts (i) all life insurance proceeds that are payable either (a) to a wife or husband of the insured or (b) to a child, parent or other person depend upon the insured, and (ii) the cash value of a policy while the insured is still alive from attachment by the creditors of the insured for the insured’s debts and liabilities, except the amount o f premiums paid by the insured in fraud of creditors.

Section 12-1001 has similar language to 5/238, except that Section 12-1001's language is not as limited, allowing the exemption to expand to a beneficiary debtor. Under Section 12-1001, some life insurance proceeds are exempt from attachment by judgment creditors of both the life insurance policy beneficiary and the insured during her lifetime. In In re Ashley, 317 BR 352, 358 (CD Ill 2004), the court concluded that,

[L]life insurance proceeds received by a debtor who was a wife, husband, or dependant of an insured are exempt for the debtor/beneficiary’s creditors’ claims. The court said the same goes for property traceable to life insurance proceeds (i.e., that have been converted into other property), but only to the extent reasonably necessary to support the debtor or his or her dependent…”

Courts tend to interpret 5/238 more favorably toward the policy beneficiaries and 12-1001 more favorably toward creditors.

Under 5/238(a) creditors can still reach premiums paid by the insured in fraud of creditors and receive payment on debts of the estate. Additionally, creditors may have access to the value of a life insurance policy if a living insured names a trust, not a person, as a beneficiary on the policy. Creditors may also have claim to debts where a beneficiary is jointly liable to the creditor, even if the beneficiary is a spouse or dependent child.

Thomas A. Pasquesi and Thomas M. Badenhausen, Life Insurance Proceeds Are Exempt From Creditors—Or Are They?, 99 Ill. Bar J. 254 (May 2011).

https://lawprofessors.typepad.com/trusts_estates_prof/2011/06/creditors-rights-to-insurance-proceeds-in-illinois-.html

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