Washington Life Producer Practice Exam

Proceeds from a life insurance policy are protected from the beneficiary's creditors by which clause?

1. Policyholder clause

2. Spendthrift trust clause

3. Protection from creditors clause

4. Beneficiary assurance clause

The correct answer is: Spendthrift trust clause

The Spendthrift trust clause is the correct answer because this specific provision within a life insurance policy is designed to protect the proceeds from being claimed by the beneficiary's creditors. When a life insurance policy includes a spendthrift clause, it prevents the beneficiary from using the payout to settle debts before they actually receive it. This means that the funds must be distributed according to the terms of the policy, and creditors cannot intercept them even if the beneficiary has outstanding debts. This type of clause also ensures that beneficiaries, especially minors or those who may not be financially savvy, are protected from mismanaging the funds. It allows the insurance company to hold and manage the proceeds until they are officially transferred to the beneficiary, thus shielding the assets from potential creditors' claims. In contrast, the other choices lack the specific legal protection that the spendthrift clause provides. The policyholder clause, protection from creditors clause, and beneficiary assurance clause do not provide the same level of protection against creditors and do not manage the distribution of the policy proceeds specifically in a way that prevents creditor claims, which is the essential function of the spendthrift trust clause.