Can the Proceeds of a Life Insurance Policy be Subject to Garnishment?

Writ of Garnishment:  an order requiring a third-party to withhold some type of property (usually money) of the defendant's (also called the “garnishee” or “judgment debtor,”) for delivery to a creditor to whom they owe an overdue debt.

A writ of garnishment, upheld by the lower court following a motion to quash, was reversed and remanded by the Michigan Court of Appeals (COA) in DC Mex Holdings LLC v Affordable Land LLC (Docket No. 332489), due to trial court error.

Facts: On October 7, 2013, plaintiff, DC Mex Holdings, LLC, was awarded a $2,500,000 judgment against defendant, Affordable Land, LLC, and defendant-appellant, Dale B. Fuller, jointly and severally. After the judgment was affirmed on appeal, DC Mex filed a request for a writ of non-periodic garnishment naming the Prudential Insurance Company of America as the garnishee because Fuller owned an individual life insurance policy from Prudential with an approximate cash value of $73,078.91.

 Prudential in its answer stated that “[l]ife insurance may be exempt from garnishment under” MCL 500.2207. Fuller argued that the funds were exempt and that the cash value was not owing and didn’t represent a debt. DC Mex did not dispute that MCL 500.2207 exempted life insurance proceeds, including the cash value, but, under DC Mex’s interpretation of MCL 500.2207, the exemption only applied when the money became payable (i.e., after the insured’s death).

The trial court, relying the plain language of MCL 600.6104(3), which allows for the satisfaction of a judgment out of any property, liquidated or unliquidated, that is not exempt, issued an order denying Fuller’s objection to the writ of garnishment.

Analysis

The statute that governs the exemption at issue on appeal is MCL 500.2207(1), which states, in relevant part:

“the proceeds of any policy of life or endowment insurance, which is payable to the wife, husband or children of the insured or to a trustee for the benefit of the wife, husband or children of the insured, including the cash value thereof, shall be exempt from execution or liability to any creditor of the insured;”

In interpreting that portion of the statute, the COA traced its history which goes back to the 1800s. The language exempting the proceeds has remained consistent over time. The court discussed at length Equitable Life Assurance Society of United States v Hitchcock, 270 Mich 72, 80; 258 NW 214 (1935). The Equitable Life Court explained that the statute . . . was later amended to add the following clause:

"And the proceeds of any policy of life or endowment insurance, which is payable to the wife, husband or children of the insured, including the cash value thereof, shall be exempt from execution or liability to any creditor of the insured."

This Court concluded that the proceeds of the policy, whether a death benefit or cash value, are exempt under MCL 500.2207 (1). The Court noted that it had previously explained that “[i]n regards to life insurance contracts, the general public policy is to protect the insurance taken out by a person for the maintenance and support of the person’s spouse and children from the claims of creditors after the person’s death” and that “[e]vidence of the Legislature’s intent as to this public policy can be found in MCL 500.2207(1) . . . .” Baltrusaitis v Cook, 174 Mich App 180, 182-183 (1988).

Change in Beneficiary

In October 2011 when DC Mex filed its lawsuit, the beneficiary of Fuller’s life insurance policy was a revocable trust for the benefits of which were Fuller’s surviving children. In 2013, he changed the beneficiary to his only child, his daughter. DC Mex argued that the trust was not exempt. 

This argument ignores the language of the statute which states “the proceeds of any policy of life or endowment insurance, which is payable to the wife, husband or children of the insured or to a trustee for the benefit of the wife, husband or children of the insured, including the cash value thereof, shall be exempt . . . .”

The exemption clearly applies to life insurance policies payable to a trustee for the benefit of the children.

Conclusion: The court concluded that the cash value of Fuller’s life insurance policy was exempt from execution by a creditor and the trial court, therefore, erred in denying the motion to quash the garnishment.