Divorce and Life Insurance: Be Aware of the Law

Life insurance plays a major role in effective financial planning to assure that a surviving spouse and the families maintain acceptable standards of living after the premature death of the “breadwinner.” For most marriage relationships, the husband will be viewed as the breadwinner, though increasingly wives are fulfilling that role.

Unfortunately, United States divorce rates are estimated at about 49 percent of all marriages. Consequently, about 50 percent of insurance policies intended to protect the surviving spouse and family are affected by divorce.

Life insurance is a contract between the insurer and the owner. As part of the contractual relationship, the owner has the right to designate a beneficiary who will receive the benefits of the policy upon death of the insured party.  But the issue of rightful claim to the proceeds of the life insurance policy after a divorce has arisen on numerous occasions. There is no uniform law among the states that resolves this matter. In addition, the preemption rights of federal law over state law may further complicate the issue.

The naming of a beneficiary on a life insurance policy or other contractual benefit, such as an IRA, cannot be taken lightly by either party to a divorce. Under state law, the content of the property settlement/separation agreement embodied in the divorce decree can determine who the beneficiary may be.

If the beneficiary can be changed and is not changed prior to death, some states protect the owner of the policy by creating a statutory presumption that the beneficiary would have been revoked by virtue of the divorce. Other states place the burden on the owner of the policy to change the beneficiary or suffer the consequences of proceeds being paid to an unintended beneficiary. In any event, all provisions and intentions of state law might well be preempted should the policy or other benefit be part of a federally-protected employee benefit plan. But unless specifically prohibited by court order, both state and federal law permit the owner of the policy to voluntarily change the beneficiary of the policy plan.

Source: Suzanne M. Gradisher, J.D., David R. Kennedy, Esq., and David Redle, Financial Planning Magazine

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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