A federal court in Chicago has ruled against a finance company, and in favor of a life insurance policyholder’s children, in a case involving the issue of assignment of policy benefits.

A 3-member panel at the 7th U.S. Circuit Court of Appeals agreed 3-0 to uphold a lower court ruling in favor of Humana Insurance Company — a life insurance unit of Humana Inc., Louisville, Ky. (NYSE:HUM) — and against Jackman Financial Corp., Chicago.

Kunta Torrence, a man who had Humana group life coverage, and the policy’s sole beneficiary died in April 2007 in a North Carolina car accident, according to court documents. The group life policy contained a “facility-of-payment” clause.

The clause stated, “If the beneficiary he or she named is not alive at the Employee’s death, the payment will be made at Our option, to any one or more of the following: Your Spouse, Your children, Your parents, Your brothers and sisters; or, Your estate,” according to court documents.

Nancy Kelly, Torrence’s mother and the administrator of the estate, assumed she would attain the $15,000 insurance policy. She assigned $10,664 of the policy over to Jackman Financial, to get a loan she could use to pay for funeral expenses. Humana later chose Torrence’s children to be the beneficiaries of his life insurance policy.

Jackman Financial argued that Kelly was entitled to the policy as administrator of Torrence’s estate and that Humana acted arbitrarily when it ignored her position.

The court held that the “facility-of-payment” clause gave Humana the sole authority to choose a beneficiary.

“Kelly never had an interest in Torrence’s life insurance policy or in its proceeds that she could assign to plaintiff either in her personal capacity or as administrator of Torrence’s estate,” Judge David Hamilton writes in an opinion for the 7th Circuit panel.

Representatives for Humana were not immediately available to comment on the case.

Adam Goodman, Jackman Financial’s lawyer, said he was not sure why Humana had moved a $15,000 life insurance benefits case into federal court.

“The estate owns the policy,” Goodman said.