You may know that the death benefit of a life insurance policy is exempt from the claims of creditors when paid to an insolvent estate where the beneficiaries are the spouse and/or children of the deceased. See T.C.A. § 56-7-201. You may also know that the cash surrender values of insurance policies and annuities are protected from creditors if the beneficiaries of the policies are the spouse and/or children of the insured or annuitant. See T.C.A. § 56-7-203.
What you probably do not know is that benefits received from health, accident or disability insurance policies are exempt from claims of creditors both during life and following the insured’s death. See T.C.A. § 26-2-110.
In a recent case, a young man (29 years old) suffering from cancer was treated at an “out-of-network” facility. The insured filed claims based on his medical bills with his health insurance provider. A number of claims were processed and nearly $50,000 was paid directly to the insured pursuant to the terms of the policy. The insured signed an agreement with the treatment center to forward any such amounts to them within three days of receipt. The insured failed to do so and died shortly thereafter.
Upon the death of the insured, the treatment center filed a claim in his estate. No exception to the claim was filed, and the claim became a judgment against the estate. The personal representative filed a motion to have the $50,000 declared exempt from execution under T.C.A. § 26-2-110.
The treatment center first argued that the motion was not timely and should have been filed in the form of an exception. The Court of Appeals ruled that the motion was timely and that the motion was akin to seeking relief from a judgment.
The treatment center next argued that the statute was not intended to apply to “typical” health insurance policies, that such insurance protects the insured against the risk of incurring medical expenses and that receipts from such policies do not fall within the statute’s exemption. The Court of Appeals disagreed.
The statute generically exempts receipts in the hands of the insured (from covered claims/events) under accident, health, or disability insurance policies from the claims of all creditors. T.C.A. § 26-2-110(a). Subsection b goes on to protect the sums in the event of the insured’s death in the same manner as life insurance proceeds are protected.
Notwithstanding the fact that the monies were payable specifically due to the amount of the medical bills incurred by the insured at that specific treatment center and the fact that the insured had agreed to forward the sums to the center, the Court of Appeals held that the health insurance benefits received by the insured and which were held as a part of the insured’s estate were not subject to execution on the claim of the treatment center (which was a valid judgment) and passed by operation of law to the insured’s heirs. The case can be found at: http://goo.gl/lVQeuK.