A spendthrift clause in a life insurance policy:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A spendthrift clause prevents the beneficiary from assigning or anticipating future policy proceeds and protects those proceeds from the beneficiary's creditors. The clause shields scheduled or retained proceeds so they are available for the beneficiary's support rather than seized for debts. The protection generally applies to the beneficiary's interest in the proceeds, not to the policyowner's cash value while the insured lives. It is a common provision in life insurance policies designed to keep death proceeds available for the intended recipient, especially when settlement options spread payments over time.
Why the other options are wrong
- B) The clause prohibits assignment of future payments rather than permitting it; a beneficiary cannot sell or pledge the future installments. This is the protective core of the spendthrift provision.
- C) Proceeds are not automatically used to pay the insured's debts; the clause protects the beneficiary's interest from creditors. The insured's debts are settled from the estate, not the death proceeds.
- D) The insurer administers proceeds under the settlement terms but does not own them in the manner described. Ownership of the proceeds passes according to the beneficiary designation, not to the insurer.
Memory hook
Spendthrift = a force field around the beneficiary's future payments from their creditors.