Life Insurance tax and credit protection

[davidalan]

(Michigan)
question#1 - Is the beneficiary of a life insurance policy taxed on the amount they recieve?

question#2 - Is the money from a life insurance policy protected from creditor's (of the deceased). A beneficiary (other than the deceaseds estate) has been named.

question #3 - Are beneficiary designations legally binding (i.e. can someone other than the named beneficiary claim they should be entitled to the proceeds based on a closer tie to the deceased).
For example, if the beneficiary is a sibling of the deceased, does a child of the deceased have any legal claim to the proceeds?

Thanks in advance for any help.
David

 

[ALawyer]

Unless you "bought" the policy, the proceeds are income tax free to the beneficiary. IF the estate was subject to Federal Estate Tax, then -- depending on state law and/or how thew Will was drawn, a portion of the proceeds may be subject to estate tax -in other words you may have to kick in your fair share.

In terms of creditors of the deceased, usually they have no claims unless it was part of a scheme to deceive.

As for contesting hte benficiary designation, face it, people can sue anyone for anything. BUT if the insured was legally and mentally competent to make the beneficiary designation at the time he or she did, and there is no written agreement or attempt at fraud, and there is no spouse with a claim on the insurance (as if the deceased was married and living in a community property state and community funds were used to buy the policy or it was from a job) the named beneficiary will be fine 999 out of 1000.