What does divorce mean for life insurance beneficiaries?

Laws that govern divorce, also known as family law, vary from state to state.  Beneficiaries of a life insurance policy may be the spouse from whom you are separating, as well as your children.  The general rule is that divorce does not affect a beneficiary designation in a life insurance policy.  

Will your spouse still be a beneficiary?

If your spouse is a beneficiary some states recognize a legal doctrine called an automatic revocation by implication.  That is, benefits that the divorced parties had previously received or could receive by virtue of their union is revoked.  

If there is an express provision in the deceased’s will or otherwise that states a divorce order will not revoke rights that the spouse had in an insurance policy, then this automatic revocation is less likely to be effective.

Will your spouse’s dependents be beneficiaries?

 Some choose to appoint irrevocable beneficiaries in insurance policies so that the divorced party has funds to support dependents after separation. This designation is sometimes given as a part of a separation agreement or divorce settlement.

 The details of such a term, if later there is controversy, may be resolved in court. In some states, if the deceased had wished the ex-spouse to remain a beneficiary after divorce, he would have to rename the ex-spouse as the beneficiary after divorce.

Because most insurance policies retain the contractual right to change beneficiaries at any time, there is no legal right on the part of the beneficiary to the legal proceeds.  If there is a separation agreement or prenuptial agreement in place that requires a spouse to have life insurance, there is a legal right in the proceeds of the policy based on contract.  

If the divorce is still pending, and there are court orders prohibiting parties to convey or dispose of property, changing beneficiaries might not apply to the prohibition.  

If in the separation agreement between two parties, a term states that divorce will eliminate any right or interest the ex-spouse has to life insurance proceeds, then the failure of the deceased to designate a new beneficiary will not render the term inoperable:  the ex-spouse will still have no interest.

The contingent beneficiary to your life insurance policy is still entitled to receive proceeds in the case that the primary beneficiary (the ex-spouse) is no longer entitled.  However, if there is a manifestation of intent on the part of the insured that the contingent beneficiary should not have rights to the proceeds (for example, if there is language in the policy that the contingent beneficiary may only receive proceeds after the death of the primary beneficiary), then the contingent beneficiary may not have access to the proceeds.  In the case where there is no explicit language of preconditions, then the contingent beneficiary will be qualified to receive the proceeds after the divorce.

Questions about life insurance and divorce?

Life insurance is a legal contract and must be evaluated with your specific situation in mind. For a consultation about the legal implications of divorce on your insurance policies, call the offices of Boonswang Law at  (215) 940-8900 or visit their website. 

Is a drug overdose considered an accidental death?

Insurance policies will differ in definitions of “accidental death,” and state law handles definitions of ‘accident’ differently as well. Additionally, there is nuance when the overdose is from a prescribed drug versus an illegal drug. For the National Institute on Drug Abuse, the medical examiner or coroner records an unintentional drug death when the drug was taken accidentally, too much of a drug was taken accidentally, the wrong drug was taken or given in error, or an accident occured in the use of a drug in medical or surgical procedures. Otherwise, the drug overdose is considered a suicide, and not an accidental death.

Typical life insurance exclusions

• Some life insurance exclusions dealing with drug overdoses address alcohol as well. The following are some examples from real policies that address drugs or alcohol:no benefits will be paid for any loss or covered injury that:  “Occurs as a consequence of being intoxicated or as a consequence of taking, using or being under the influence of any narcotic unless administered on the advice of a physician.
• Accidental death benefits are not payable when death occurs as the result of taking drugs or medications that are not prescribed to the decedent, or when taking them against prescribed orders.
• In no event will we pay a benefit where loss or injury is caused directly or indirectly by, results from, or there is contribution from, any of the following: (6) motor vehicle collision or accident where you are the operator of the motor vehicle and your blood alcohol level meets or exceeds the level at which intoxication is defined in the state where the collision or accident occurred, regardless of the outcome of any legal proceedings connected thereto.
• The policy does not cover any loss resulting from injury sustained as a result of being legally intoxicated from the use of alcohol.

Does life insurance pay if death was caused by overdose?

Most policies will not cover an overdose where the victim knowingly used illegal drugs.  Overdoses are often a result of an improperly prescribed medication or an accidental double dose of narcotic painkiller or other sedative-type medications. In these cases, there is a high likelihood that the claim will be covered as an accidental death, especially if the deceased was in the care of medical professionals at the time of the overdose. 

Can you have too many insurance policies?

There is no law against having multiple insurance policies, life insurance or otherwise. The downsides to having multiple policies have to do with additional costs and hassle of keeping up with multiple policy payments.

Why should you have more than one policy?

• To account for your loss of income when you pass away and to provide financial protection to your family
• To cover debt or loans, such as a mortgage or car note’
• To provide financial security to a business partner and enable your business to continue uninterrupted after you die
• To cover potential inheritance tax liability against your estate.

Spread the Risk

Additionally, since different policies have different premiums and some insurance companies will deny claims for certain reasons that others would not, having multiple claims would spread the risk of any one claim being denied.

Economically, it could make sense to buy a cheaper policy that has many exclusions, a more expensive but expansive policy, and have the policies differ in years of coverage.

This way, the cost is more distributed and policies are in effect for different situations.

Disclose Secondary Policies

There are, however, steps that need to be taken to make sure that multiple policies pay out in the ways that you intend. The companies you purchase the policies from must each know that you have additional other policies.

Disclosure of your other policies might be on the applications themselves or, if there is not a question that addresses this, you should take steps to find out how the company handles the existence of other policies.

The existence of other policies affects the value of the policy, since there is a limit on value based on age and income, or what other sources of income could be funding a family’s financial obligations after death.

If the other policies are not disclosed, claims could be denied based on material misrepresentation or other reasons.

How to apply for multiple policies?

There are ways to make applying for multiple policies easier.

There are agencies you can hire which will represent insurance companies. This way you can just use one medical exam and packet of records, and avoid spending a ton of time doing repetitive submissions.

However, it is still important to do independent research on each of the policies to ensure that all the information that the agency provides to you is accurate, and that you have taken advantage of all the additional riders that may come with certain policies.

What happens to insurance policies after divorce?

If you are married and intend to plan for situations in which a separation might occur, be sure to consider how the multiple policies and benefits will be divided. In the case of Hall v. Hall, the wife of an insured person who held multiple policies had a divorce decree which split the cash value of the life insurance policies. One of the issues in this case had to do with weather the policies only included the ex-husband and wife’s policies, or the policies of the whole family.

Life Insurance Retained Asset Accounts Explained

 Retained Asset Accounts, also known as RAAs, are tools created by life insurance companies as an alternative to paying out a lump sum.  You can think of an RAA as a pseudo bank account: the proceeds that would have normally been paid out are deposited in the insurance company’s corporate account, and you can access their funds via writing a check.

The Dangers of RAAs

Many policyholders have experienced difficulties with RAAs.  When they attempted to draft money from their account, they suffered significant delays.  

An RAA is not like a traditional bank account because the account actually belongs to the insurance company.  They are earning interest from your insurance proceeds that are deposited in their corporate account.

What Your Insurance Company Gains From RAAs

Some insurance companies make the RAA option seem more attractive by offering the policy holder a percentage of the interest that they earn.  While this is indeed an attractive benefit, there is significant concern surrounding which vendors do not accept RAA checks, as well as the general safety of the money that is deposited.  

Traditional banks are insured by the Federal Deposit Insurance Corporation, or FDIC. Your bank account is insured up to $250,000.

RAAs, on the other hand, are not insured by the FDIC. If the insurance company issuing the policy is not in good financial health and do not have the funds to distribute later on, there is no entity to pay you the money you are owed.

Recent Developments on RAAs

In a recent case, Huffman, individually and on behalf of a class, v. The Prudential Insurance Company of America, 2017 WL 6055225 (E.D. Pa. 2017), the Eastern District of Pennsylvania decided that The Prudential Insurance Company of America violated ERISA, a body of federal law, by depositing life insurance proceeds into RAAs.  This means that Prudential, along with other insurance companies that operate in Pennsylvania, will no longer be able to use them as the default method of paying out benefits.

States Differ In Treatment of RAAs

Because the insurance industry is regulated on a state level, the treatment of RAAs after the Huffman case will still have variations.

For example, while Florida allows the use of RAAs though Fla. Stat. Ann. § 627.473[1], Indiana has no explicit statutes or regulations that allows or disallows for RAAs.  Florida’s statute reads as follows:

“Any life insurer shall have the power to hold under agreement the proceeds of any policy issued by it, upon such terms and restrictions as to revocation by the policyholder and control by the beneficiaries and with such exemptions from the claims of creditors of beneficiaries other than the policyholder as set forth in the policy or as agreed to in writing by the insurer and the policyholder. Upon maturity of a policy, in the event the policyholder has made no such agreement, the insurer shall have the power to hold the proceeds of the policy under an agreement with the beneficiaries. The insurer shall not be required to segregate the funds so held but may hold them as part of its general assets.”

It is likely that Huffman will influence more states to address the validity and legality of various aspects of RAAs.

Coping with the death of a loved one can be an emotionally taxing experience. While finances may be the last thing on your mind, understanding the basics of estates, trusts, and life insurance can help to navigate these complex processes when the time comes.

Estates

A deceased individual’s estate is the sum total of his or her assets, i.e. all the property that he or she owned at death. This can take the form of real estate, bank accounts, automobiles, stocks, insurance policies, or virtually anything else of financial value.

Estates are distributed through a process called probate. Probate frequently involves the use of the deceased’s will. The executor, often a trusted friend or family member of the deceased, oversees the distribution process according to the terms of the will. The executor acts as a sort of middleman in between the deceased person and the  beneficiaries, often spouses, children, or relatives of the deceased, who are each entitled to a portion of the estate.

In the case of high-value estates, probate may become a heavily litigated process, with multiple parties claiming to be entitled to the same assets. It’s also important to note that the probate court process varies on a state-by-state basis. For instance, many states allow people with few or no assets to avoid probate (see Cal Prob Code § 13100).

Trusts

A trust is an independent financial entity created when an individual (the “grantor”) puts money or assets aside to be managed, invested, and distributed by a trustee. Trusts may assign an individual or an asset management company (AMC) as trustee, and they may afford varying levels of discretion to the trustee. Some trusts specify that the trustee can distribute funds “as needed,” while others specify restricted uses or amounts at specific time intervals (see the “Spendthrift trusts” section of our previous blog post).

Because trusts are not technically “owned” by anyone, they are not counted as part of the grantor’s estate. In high-value estates (only those with values over $11.18 million as of recent tax changes), placing assets into a trust can help to minimize federal estate taxes (see our previous blog post). Trusts are also typically distributed at the discretion of the trustee, avoiding the probate process altogether.

Life insurance

In most cases, life insurance is not treated as part of the deceased’s estate or as a form of trust, but as a separate fund altogether (see our previous blog posts on probate and trusts for exceptions). With life insurance policies, the beneficiary must file a claim with the insurance company before being paid the death benefit. This typically involves 3 steps (see our previous blog post):

• Step 1: Gather all relevant information about the policy by looking through the deceased’s records, bank statements, taxes, etc.
• Step 2: Contact the insurance company and let them know of the insured’s death
• Step 3: Fill out claim forms and send a certified copy of the insured’s death certificate

After completing these steps, you should be paid within 2 months. However, life insurance companies will frequently delay or deny legitimate claims in order to maximize their own profits. If you believe your claim has been unlawfully delayed or denied, don’t hesitate to contact an experienced life insurance lawyer.

A trust is a financial entity created when an individual puts money or assets aside to be managed, invested, and distributed by a trustee. Trusts may assign an individual or an asset management company (AMC) as trustee, to which the terms of the trust may afford varying levels of discretion. Some trusts specify that the trustee can distribute funds “as needed,” while others specify restricted uses or amounts at specific time intervals (see the “Spendthrift trusts” section of our previous blog post).

Life insurance policies are typically “owned” by the policyholder, i.e. the person who applies for and pays premiums on the policy. Life insurance trusts are created when ownership of a policy is transferred from the policyholder to a trustee. Upon the insured’s death, the death benefit will be paid to the trustee and distributed to the beneficiary or beneficiaries by the trustee.

Why use a life insurance trust?

Although life insurance trusts do not typically offer advantages over personally-owned policies to the average consumer, there are a few situations in which creating a life insurance trust may be prudent.

Estate taxes

Although recent tax changes more than doubled the exemption threshold for federal estate taxes, estates worth over $11.18 million are still subject to a 40% tax rate. If the death benefit is transferred to the insured’s estate following his or her death (see our previous blog post), it may be subject to estate taxes. However, if the policy was owned by a trustee as part of a trust, it will escape taxation on the insured’s estate since it is not technically “owned” by the insured.

Control over distribution of death benefit

In a typical life insurance policy, the death benefit is transferred from the insurance company directly to the beneficiary or beneficiaries upon the insured’s death. However, life insurance trusts may afford full discretion over distribution of the death benefit to a family member or close friend as trustee, allowing them to control who gets what and when. This can be useful when children or financially irresponsible adults, who could not be trusted with the full death benefit, are named as beneficiaries to the trust. Additionally, since the trustee (rather than the beneficiary) controls the death benefit, it is protected from the beneficiary’s creditors.

Term life insurance policies are temporary and provide coverage for a specified period of time. Term life policies are simple: the policyholder pays regular premiums in exchange for a death benefit in the event of the insured’s death. There is no accumulated cash value, and premiums stay constant throughout the duration of the term.

If the expired term life policy included a conversion provision or rider, the policyholder can choose to convert the temporary term life policy into a whole life policy. In contrast to term life policies, which provide coverage up until the end of the term, whole life policies provide coverage for the entirety of the insured’s life or until a designated age such as 65, 75, or 100 years old. Whole life policies also accrue permanent cash value in addition to the death benefit. Since they are more valuable than term life policies, whole life policies often require substantially higher premiums.

Converting a term life policy to a whole life policy is often a simple process, and it can be beneficial on multiple levels. Conversion riders rarely require that the insured undergo a new medical exam or complete a new health questionnaire, which can be valuable if the insured developed a serious medical condition during the time that he or she was covered by the term life policy. Additionally, whole life policies specify future premium rates that are not subject to change. Even if the insured develops a terminal illness, he or she will still only need to pay the premiums listed on the policy.

However, conversion is not always the best option. Factors such as age, financial security, and health are all relevant and should be considered before converting to a whole life policy. For instance, if you are in good health and interested in taking out whole life insurance, it might be best to apply for a new policy altogether. Elderly individuals who only need to secure coverage for the next five or ten years may find that term life better meets their needs. Still, if you are happy with your current term life insurance and wish to make it permanent, conversion can be a worthwhile option.

When taking out a life insurance policy, the policyholder must name one or more “beneficiaries” who will receive the death benefit if the insured passes away while covered by the policy. Policyholders have multiple options for choosing beneficiaries:

Primary and contingent beneficiaries

The “primary beneficiary” on a life insurance policy is the first in line to receive the death benefit. A “contingent beneficiary” or “secondary beneficiary” may receive the death benefit in place of the primary beneficiary if specific, predetermined provisions are satisfied. In most cases, a contingent beneficiary will only receive the death benefit if the primary beneficiary is deceased or unreachable. For policyholders, listing a contingent or secondary beneficiary can act as a safeguard in case something happens to the primary beneficiary (see our previous blog post).

Multiple beneficiaries

If the policyholder would like to name multiple beneficiaries to a single policy, he or she can specify any number of “co-beneficiaries.” When multiple beneficiaries are listed, insurance companies can split the same death benefit amongst them. Policyholders may specify who receives what percentage of the death benefit, or they may request that it be distributed evenly.

It is possible to designate multiple primary co-beneficiaries, as well as multiple contingent co-beneficiaries. For policies with multiple primary beneficiaries, the contingent beneficiary or beneficiaries will likely only receive the death benefit if none of the primary beneficiaries are reachable. If this happens to be the case, each contingent beneficiary will receive their designated portion of the death benefit.

However, legal debates frequently arise when multiple parties claim to be the validly named beneficiary to a life insurance policy (see our previous blog post). If you were the beneficiary to a life insurance policy yet your claim was unlawfully denied, don’t hesitate to contact an experienced life insurance lawyer.