Arizona life insurance beneficiaries who are deemed to have “insurable interests” in the lives of another, other than those effecting the insurance or their legal representatives, are “entitled to [life insurance] proceeds against the creditors and representatives of the person effecting the insurance.” A.R.S. § 20-1131(A).
Not everyone is entitled to be a beneficiary of a life insurance policy on the life of another. In fact, only the following parties are permitted to have an “insurable interest” in the life of another:
1. In the case of individuals related closely by blood or by law, a substantial interest engendered by love and affection.
2. In the case of other persons, a lawful and substantial economic interest in having the life, health or bodily safety of the individual insured continue, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the individual insured.
3. An individual party to a contract or option for the purchase or sale of an interest in a business partnership or firm, or of shares of stock of a closed corporation or of an interest in the shares, has an insurable interest in the life of each individual party to the contract and for the purposes of the contract only, in addition to any insurable interest which may otherwise exist as to the life of the individual.
4. A charitable organization as provided in section 43-1201, paragraph 4, which has a policy ownership interest has an insurable interest in the life of each proposed insured who joins with the charitable organization in applying for a life insurance policy naming the charitable organization as owner and irrevocable beneficiary.
A.R.S. § 20-1104.
Cash Surrender Value Beneficiaries
In addition to proceeds that are payable at death, many life insurance policies also have a cash surrender value, however, the class of beneficiaries that may receive such proceeds against the creditors of the insured is significantly smaller than the class that receives proceeds payable at death against the creditors of the insured.
In particular, if a person was continuously insured for a period of two years by an unexpired life insurance policy and that life insurance policy names the insured’s “surviving spouse, child, parent, bother, sister or any other dependent family member” as beneficiary, the cash surrender value of such policy is “exempt from claims and demands of all creditors, other than a creditor to whom the policy has been pledged or assigned, and except that, subject to the statute of limitations, the amount of any premiums which are recoverable or avoidable by a creditor pursuant to title 44, chapter 8, article 1, with interest, shall inure to their benefit from the cash surrender value.” A.R.S. § 20-1131(D).
This brief overview of some important considerations associated with life insurance and protection from creditors under Arizona law is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.