by microflyer38 » Tue Jul 10, 2012 05:47 pm
A friend of mine was served papers today and foolishly settled the lawsuit the very same day. Now she realizes she can't pay the settlement and is afraid her life insurance policy will be in danger.
I informed her that under New York's Insurance Law Section 3212(b)(1), I don't think the other party can lay hands on her policy. She claims her lawyer says otherwise, but won't elaborate because she's still very emotional at this point.
Without necessarily providing legal advice, what information can I look for to ease her worries?
I informed her that under New York's Insurance Law Section 3212(b)(1), I don't think the other party can lay hands on her policy. She claims her lawyer says otherwise, but won't elaborate because she's still very emotional at this point.
Without necessarily providing legal advice, what information can I look for to ease her worries?
Posted: Wed Jul 11, 2012 04:15 pm Post Subject:
I had the chance to review the law citations you posted, and at first glance, I would agree with your assertion that the proceeds, whether living or death benefits, would NOT be available to any creditors of the insured, beneficiary or policy owner.
Now, I'm not an attorney. I have, however, been playing with insurance law for more than 25 years. It is rare that creditors can go after the proceeds of a policy. There are certain exceptions, but in this case, I don't see them.
Maybe Max will chime in on this one... he's pretty good at deciphering legal BS.
InsTeacher 8)
Posted: Wed Jul 11, 2012 07:51 pm Post Subject:
Here's a different viewpoint and I have not looked at the statute. Let's assume that the other party can't lay their hands on the policy.
The policy still isn't safe simply because she still needs to pay what she owes. She has just agreed to pay. She simply may have no choice other than using this policy to settle her lawsuit.
Posted: Thu Jul 12, 2012 01:24 am Post Subject:
The policy still isn't safe simply because she still needs to pay what she owes. She has just agreed to pay. She simply may have no choice other than using this policy to settle her lawsuit.
Well, the policy is still "safe" and any creditors will likely be prevented from attaching any of the values contained within the policy, such as cash value, etc. as well as protecting the death benefit if the insured dies.
What I hear you saying is that, in the event she needs additional funds to "pay off" any lawsuit judgment, she may have to access the funds within her contract.
You might be right on that point.
InsTeacher 8)
Posted: Thu Jul 12, 2012 10:09 am Post Subject:
To be clear, InsTeacher, I do not disagree with anything that you have written here.
I'll try to word my post differently:
"Creditors may not legally be able to go specifically after the insurance policy, but her need to pay may force her to use the insurance policy. The end result may be the same."
Posted: Thu Jul 12, 2012 03:53 pm Post Subject:
Maybe Max will chime in on this one
DING!
The policy still isn't safe
her need to pay may force her to use the insurance policy.
So might her need to take a vacation.
Our anonymous friend just likes to stir up the pot with his parsing of responses to questions. And now he raises an issue that has nothing to do with the question posed by the OP.
The LEGAL QUESTION at issue is not whether a person may voluntarily choose to use life insurance proceeds or values to pay her debts, it is whether a judgment can be obtained that SPECIFICALLY FORCES the liquidation of those policy proceeds and/or surrender values into the hands of a person's creditors.
Creditors may obtain legal judgments and enforcement orders that allow them to garnish wages, or seize certain personal property, including bank accounts depending on the creditor, but LIFE INSURANCE, ANNUITIES, and RETIREMENT PLAN ASSETS are off limits to the reach of creditors until that money is actually in the hands of the judgment debtor.
So let's just stick to answering questions, not raising and discussing the what-ifs. We all know that people can do just about anything with their life insurance cash value that they want to do. The question is what can creditors force them to do. And the answer is NOTHING.
The OP's friend could pay the life insurance premiums for the next 50 years and avoid paying any portion of the judgment in that same time, and suddenly die, and all the money would go to the named beneficiary without interference of any sort by the judgment creditor. The only claim the creditor would have is against the estate of the decedent. And if there is nothing there the creditor gets what they deserve. Nothing. They had 50 years to collect and they never did.
What the creditor may not do is petition a court to force the liquidation of life insurance cash value to satisfy payment of the debt. Even though there is a tacit agreement to pay the debt, the life insurance is not part of the discussion. PERIOD. The creditor cannot even stop her from paying the insurance premiums -- unless they can get to that money first each month. Direct deposit your paychecks, pay your premiums by ACH withdrawal, and the most the creditor can do is garnish your wages. But even then, they can't get 100% of your wages.
Since January 1, 1940 ("after December thirty-first, nineteen hundred thirty-nine."), according to 3212(a)(3), 3212(b)(1) prohibits direct claims against the policy, its values ("avails"), or proceeds by creditors of the policyowner:
(b) (1) If a policy of insurance has been or shall be effected by any person on his own life in favor of a third person beneficiary, or made payable otherwise to a third person, such third person shall be entitled to the proceeds and avails of such policy as against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person effecting the insurance.
Posted: Thu Jul 12, 2012 04:29 pm Post Subject:
While the IRS can grab your bank accounts and your cars, boats, airplanes jewelry, and homes to satisfy your unpaid income taxes, even they cannot force you to give up your retirement plan assets, your annuities, or your life insurance in most cases (they can if you have used ill-gotten gains -- such as fraudulent tax refunds or money laundering proceeds -- to obtain those things).
The best the IRS can do if you're not a criminal in some other respect, is to offer you the right to take the money from the account without the 10% penalty tax if you're under age 59-1/2 -- but they'll still make you pay the income tax on it.
And, when it comes to things like Medicaid, life insurance CASH VALUE may have to be spent down to $1500 in order to qualify for "share of cost" benefits under the Spousal Impoverishment Act. But they can't force you to do that. If you don't want to, you just won't qualify for the government's help.
Just one more reason not to tie up your life insurance within your taxable estate, as too many people do.
Posted: Thu Jul 12, 2012 05:57 pm Post Subject:
Max, the OP said that her friend said that her lawyer said...
When we get that far down the line, we have no idea what exactly the lawyer means.
A general question of whether life insurance has creditor protection may be very different than what is being asked here.
For instance creditor protection doesn't mean squat if not paying this settlement will result in a wage garnishment which will cause her not to be able to pay her insurance premiums.
So, the bottom line is that not being available to creditors is not the same as it being safe.
Posted: Thu Jul 12, 2012 06:05 pm Post Subject:
not being available to creditors is not the same as it being safe.
Parse on, friend. The person who introduced the word "safe" -- and the only person to use it in their comments -- was . . . you.
her friend said that her lawyer said...
True. And we know that some lawyers have no clue when it comes to insurance, too.
Posted: Thu Jul 12, 2012 07:10 pm Post Subject:
If it makes you happy, I'll use her words in my quote.
"Not being available to creditors is not the same as the policy not being in danger."
Posted: Thu Jul 12, 2012 11:26 pm Post Subject:
OK, fine. The "danger" referred to is the life insurance policy being attacked by her creditors, and the answer is there is no danger of that. No one can force her to liquidate or borrow from the policy to pay some other debt. She may choose to do so voluntarily, as anyone may.
And when it comes to paying off a judgment, in the absence of a wage garnishment, my advice to her is to pay all of her insurance premiums (life, auto, homeowners, etc) and all of her personal expenses (food, rent, utilities) first, and let the creditor complain about not being paid all that she agreed to pay. Paying even $1 per month can potentially forestall a wage garnishment, which requires a court order .
She could also go to bankruptcy court and possibly have the judgment exonerated along with any other debts.
In the meantime, she could also find an attorney who might be able to challenge her consent to the settlement, have it vacated by the court, and adjudicate the whole matter like she should have done.
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