What happens to policy proceeds from a life insurance policy when the insured passes away?

When the insured passes away, the proceeds from a life insurance policy are typically protected from creditors under the spendthrift clause. This clause is designed to safeguard the policy proceeds from claims by creditors, ensuring that beneficiaries receive the full amount intended for them without having those proceeds being claimed by creditors of the deceased's estate.

The spendthrift clause provides that the beneficiary does not have the ability to sell or transfer their right to the policy proceeds before they are actually received. This means that even if the insured had debts, creditors generally cannot touch the life insurance proceeds, which are meant to provide financial support to beneficiaries without being diminished by the deceased's financial obligations.

In other cases, policy proceeds could be subject to income tax, but generally, life insurance death benefits are not taxable to the beneficiary as income. Additionally, proceeds are not automatically paid to creditors or frozen until the estate is settled, meaning that beneficiaries can usually access the insurance money without those delays or legal entanglements.