If you're named as the beneficiary on a life insurance policy, chances are good that you're anticipating a substantial windfall. The average life insurance policy's death benefit exceeds $100,000 by a substantial margin. Although it's likely that you have debts and obligations that might prevent you from spending the bulk of your benefit, it's virtually certain that you'll welcome your payout.
However, you might be worried that you won't see the full amount of your death benefit. If you believe that your benefactor is likely to die with a substantial amount of debt on his or her estate, you might be wondering whether his or her creditors are allowed to seize a portion of your death benefit. Alternatively, you might wonder whether the IRS is entitled to seize some of your benefit in order to cover your benefactor's back-tax debts. Before you make any plans for the funds that you stand to receive, take a moment to familiarize yourself with the protocols that govern the disbursement and seizure of life insurance benefits.
For starters, the bulk of your life insurance benefits are likely to be safe from the IRS. Despite the agency's immense power and "carte blanche" authority to seize most forms of income and savings for the purposes of settling back-tax debt, the IRS is prohibited from seizing life insurance premium payments and benefits. The reason for this is simple: Since a given policy's benefits become the property of its beneficiary after their disbursement, it wouldn't be fair for the IRS to seize them in order to pay down the benefactor's debts. The IRS is prohibited from seizing ongoing premium payments for a similar reason.
The same basic principle applies to private creditors. In fact, most life insurance policies explicitly state that their benefits can't be used to settle personal debts on an involuntary basis. If you wish to use the benefits that you receive to pay off your benefactor's debts, you won't be stopped. However, you're under no obligation to do so.
There's one special situation in which you might be held liable for your benefactor's debts. If you cosigned a mortgage, auto loan or other credit facility with your benefactor, you'll become the sole borrower on these facilities after his or her death. As such, you'll become responsible for making timely payments on them. If one of these credit facilities is a mortgage, it's possible that its issuer will initiate foreclosure proceedings.