New Jersey Life Producer Practice Exam

If a creditor has a claim on death benefits, who are those benefits payable to?

1. The current policyholder

2. The insured debtor

3. The issuer of the policy

4. The insured's beneficiaries

The correct answer is: The insured debtor

In situations where a creditor has a claim on death benefits, the benefits are payable to the insured debtor. This occurs because the life insurance policy is often considered an asset of the insured. If the insured passes away and there are outstanding debts, the creditor can claim the death benefits to settle those debts. This aspect of creditor claims underscores the principle that life insurance can be subject to the financial obligations of the insured individual. When the insured debtor dies, the insurance company is obligated to pay the death benefit to satisfy the insured's debts before any remaining amount is distributed to the beneficiaries. This ensures that creditors are compensated for the debts owed by the deceased. In this context, it is important to differentiate that the current policyholder (who may not be the insured) or the designated beneficiaries will not receive the death benefits first if a creditor has a valid claim. The policy is designed primarily to fulfill the financial obligations of the insured rather than to directly benefit others if there are debts owed at the time of death.