Spendthrift clause

A spendthrift clause restricts a beneficiary's ability to sell, assign or borrow against payments that haven't been made yet, and in most states it also shields those unpaid amounts from the beneficiary's creditors. In life insurance, it typically applies when proceeds are left with the insurer under installment, interest-only or life income settlement options. Spendthrift provisions are also standard in trusts.

The protection covers money while the insurer or trustee still holds it. Hypothetically, if a son receives $2,000 a month from his late mother's policy under a fixed-period option with a spendthrift clause, his creditors generally can't garnish the future installments from the insurer, and he can't sell the payment stream to a buyer for cash now. Once a payment reaches his bank account, though, it's usually treated like the rest of his money.

The clause helps owners who worry that a beneficiary will waste a lump sum or face debts, lawsuits or divorce. Protection depends on state law, and exceptions exist, such as certain government claims or child support in some states. For more control, owners often name a trust with spendthrift terms as beneficiary instead. See can creditors take life insurance money? and naming a trust as your life insurance beneficiary.