Yes, but only in limited situations. Most of the time, a creditor cannot take life insurance proceeds. Problems arise mainly because of how the policy is structured or because of specific legal obligations tied to the insured.
Here is how it works in practice.
When creditors usually cannot touch life insurance proceeds
If a life insurance policy names an individual beneficiary, such as a spouse, child, or other person, the death benefit usually passes directly to that beneficiary. It does not go through probate. Because of that, ordinary creditors of the deceased generally have no right to those funds.
This is one of the main reasons people buy life insurance. It is designed to protect beneficiaries, not to pay off the insured’s credit cards or personal loans.
When creditors may have a valid claim
There are several important exceptions.
The estate is the beneficiary
If the policy names the estate as the beneficiary, or if no beneficiary is listed, the proceeds become part of the probate estate. Once that happens, creditors can make claims against the money just like they would against any other estate asset. Medical bills, loans, and other debts may be paid before heirs receive anything.
Court ordered obligations
Life insurance can be reached to satisfy certain court ordered debts. The most common examples are child support and spousal support. If a divorce decree or support order required the insured to maintain life insurance for someone’s benefit, those proceeds may be claimed to satisfy that obligation.
Judgments and liens tied to the policy
If a creditor obtained a judgment during the insured’s lifetime and properly attached or assigned the life insurance policy, that creditor may have rights to some or all of the proceeds. This is not common, but it does happen in larger judgment cases.
Estate taxes
In higher value estates, life insurance proceeds may be considered when calculating estate taxes, depending on ownership and control of the policy. In those cases, the estate may use insurance proceeds to pay taxes even if beneficiaries are named, although this usually depends on policy structure and state law.
Fraudulent transfers
If a policyholder changed beneficiaries or moved ownership specifically to avoid paying creditors, a court may undo that change. Creditors can sometimes challenge last minute beneficiary changes if they were made to hinder lawful debt collection.
What creditors generally cannot do
Creditors cannot simply call the insurance company and demand payment because the insured owed money. They also cannot override a valid beneficiary designation just because the estate has debts. Life insurance is not a general debt collection tool.
How people protect life insurance from creditors
Naming individual beneficiaries instead of the estate is the biggest step. Many people also use trusts in more complex situations, especially when there are large debts, blended families, or business obligations. Keeping beneficiary designations current matters just as much as choosing the right structure.
Why disputes still happen
Even though the rules are fairly clear, insurers often face competing demands from beneficiaries, estates, and creditors. When that happens, the insurer may file an interpleader action and let a court decide who is legally entitled to the money.