California Life and Health Insurance Practice Exam

A spendthrift clause in a life insurance policy does what?

1. Allows beneficiaries unrestricted access to the benefits

2. Restricts the ability of the beneficiary to assign benefits

3. Increases the policy's cash value

4. Enables the insurer to change beneficiaries

The correct answer is: Restricts the ability of the beneficiary to assign benefits

A spendthrift clause in a life insurance policy serves a specific function aimed at protecting the death benefit from being mismanaged by the beneficiary. By restricting the beneficiary's ability to assign the benefits, this clause ensures that the insurance proceeds are not subject to claims from creditors or that they cannot be transferred to others who may not have the same financial responsibility. This means that the benefits are protected for the designated beneficiary, allowing them to manage the funds appropriately and preventing them from squandering the proceeds. This protective measure is especially important in cases where the beneficiary may be financially irresponsible or where there is a concern that creditors could seize the benefits. Consequently, the spendthrift clause creates a safeguard, ensuring that the payout will remain intact for its intended purpose.