AD Banker Comprehensive Practice Exam

The main purpose of the spendthrift clause contained in a settlement option is to prevent the beneficiary from doing all of the following, except:

1. Purchasing a new car once the claim has been settled and proceeds have been paid out according to the beneficiary designations

2. Transferring the proceeds of the policy

3. Encumbering the proceeds of the policy

4. Commuting the proceeds of the policy

The correct answer is: Purchasing a new car once the claim has been settled and proceeds have been paid out according to the beneficiary designations

The spendthrift clause is a provision designed to protect the proceeds of a life insurance policy or other financial benefits meant for a beneficiary. Its primary function is to restrict the beneficiary's ability to access or control the funds in a way that could lead to mismanagement or quick depletion of the benefits received. In the context of the choices provided, the main purpose of the spendthrift clause comes into play specifically concerning the management and control of the policy proceeds. Choosing to purchase a new car after the claim has been settled and the proceeds have been paid out does not violate the intent of a spendthrift clause because once the proceeds are disbursed to the beneficiary, they are no longer under the restrictive protections of the clause. The beneficiary is free to use the funds as they see fit, including making large purchases like a car. On the other hand, transferring the proceeds, encumbering them (putting them as collateral), and commuting the proceeds (exchanging future benefits for a lump sum) are actions that the spendthrift clause is designed to prevent until the beneficiary is ready to assume full control over the funds without the risk of mismanagement. Thus, the correct answer aligns with the notion that a spendthrift clause safeguards