When are life insurance proceeds not exempt from creditor claims?

Life insurance proceeds are typically exempt from creditor claims when they are directly payable to designated beneficiaries. However, when the proceeds are payable to the insured's estate, they effectively become part of the estate's assets. This means that creditors of the estate may have a claim against these proceeds to satisfy debts owed by the deceased.

The rationale behind this is that estate assets are subject to probate and can be used to settle outstanding claims. If life insurance proceeds were paid directly to beneficiaries, they would generally not be available to creditors, preserving the financial benefit intended for those beneficiaries. Therefore, when the proceeds are payable to the insured's estate, they lose their exempt status from creditor claims.

In contrast, proceeds paid to a trust, a family member, or a specific type of policy like a term life insurance policy do not automatically subject those funds to creditor claims in the same way, thus maintaining their protected status under most circumstances.