The Fraudulent Debtor: Liability of Debtor’s Life Insurance Proceeds Beyond the Grave

Kevin P. Nelson • March 16, 2017

It is well-settled under Arizona law that life insurance proceeds payable to beneficiaries, other than the deceased debtor, are exempt from claims against the deceased debtor’s estate. That rule has stood for more than sixty years and is supported by statute, A.R.S. S 20-1131(A), and the Arizona case, May v. Ellis, 208 Ariz. 229, 230-31, 92 P.3d 859, 860 (2004). In fact, in 2008, the Arizona legislature clarified the rule by confirming that life insurance proceeds are exempt from such claims regardless of whether the beneficiary is an individual or a trust.

The reason for the rule is to protect life insurance proceeds that “do not come into existence during [the insured’s] life, never belong to [the insured], and pass to the beneficiary by virtue of the contractual agreement between the insured and the insurer.”In re Succession of Halligan, 887 So.2d 109, 113 (La. Ct. App. 2004) (internal citations omitted).The general policy behind the rule is that a beneficiary of life insurance proceeds, such as a child or spouse, should not be held accountable for debt incurred by the deceased debtor over which the beneficiary had no control.Overall, this provides substantial benefits to the non-debtor beneficiaries.However, there is one exception.


The exception to the rule is stated under A.R.S. S 20-1131(B) and provides that “the amount of any premiums for insurance paid in fraud of creditors, with interest, shall inure to the[] [creditors’] benefit from the proceeds of the policy.” Because the application of A.R.S. S 20-1131(B) has not been addressed in any reported Arizona case law, what a creditor would be required to prove to obtain such life insurance proceeds is subject to debate.What is clear, however, is that the creditor would have to prove that the premiums were paid “in fraud of creditors.” If successful, the creditor’s recovery would be limited to the amount of the premiums at issue with interest either at the contractual interest rate or, if no contractual interest rate is present, Arizona’s 10% default interest rate.


What must be proven to show that premiums were paid “in fraud of creditors” has been addressed by non-Arizona state courts.Some states find that fraud may be presumed when a debtor is insolvent and diverts assets to the payment of premiums rather than to a creditor who existed at the time the premiums were paid.Other states require that the creditor prove actual fraudulent intent that is shared by both the debtor and the beneficiary.And some states require a creditor to trace the misappropriated funds to the payment of life insurance premiums when the fraud occurs after the life insurance policy has been procured.Regardless of what a creditor must prove, considering the public policy behind the protection of life insurance proceeds, it is clear that the creditor’s burden of proof is high.


In summary, creditors should be aware that they may have recourse against the proceeds of a deceased debtor’s life insurance policy.While the pursuit and recovery of life insurance proceeds should be limited to the most egregious of circumstances, Tiffany & Bosco has the experience necessary to assist our clients in the evaluation and pursuit of such claims.

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