For the most part, the process of naming beneficiaries to a life insurance policy is the same across all states. In fact, unless prohibited to do so by law, anyone can be named as beneficiary to a life insurance policy, regardless of whether or not he or she has any vested interested in the insured. The process of changing beneficiaries can be initiated at any time the insured wishes to do so. However, divorce can heavily complicate this process (see our previous blog post). Some states automatically revoke ex-spouses as beneficiaries after filing for divorce, but California does not. California, which is notorious for having the worst divorce law in the United States, can add an additional layer of complexity.
California is one of nine (9) community property states, which dictate that all property acquired during marriage belongs equally to both parties. This generally does not apply to term life insurance since term life policies are temporary; when a term life policy expires, there is no accumulated value left over to distribute. After divorce, the policyholder will most likely retain his/her term life policy and be allowed to name new beneficiaries in place of his/her ex-spouse. Conversely, it is also common for the ex-spouse who was originally listed as beneficiary to take over ownership of the policy and begin making premium payments, with himself or herself as both policyholder and beneficiary.
However, the community property rule does apply to policies with an accumulated “cash value,” most often in the form of “whole life” policies, provided that the policy was purchased during marriage with community funds. In these cases, the policy’s cash value will be divided equitably between the spouses, but ownership of the policy will usually transfer to the spouse listed as beneficiary. This means that the insured’s ex-spouse, who now owns the policy, is obligated to make premium payments and reserves the right to change the beneficiary.
Let’s consider an example. Willy purchased a whole life insurance policy and named his wife, Kate, as beneficiary. After years of paying on the policy and accumulating $10,000 in cash value, Willy and Kate file for divorce. The divorce decree dictates that Willy and Kate each receive $5,000 of the accumulated cash value, while ownership of the policy transfers to Kate. Now, Kate is in charge of making premium payments on the policy and will receive the death benefit if Willy passes away. Willy can no longer switch the beneficiary from Kate to someone else. Kate now owns the policy, and only she has the right to change the beneficiary from herself to someone else.
It’s important to remember that, while the above situation is often the case in California marital settlement agreements and divorce decrees, the manner in which community life insurance policies are divided is entirely circumstantial. Often, judges will use their own discretion to figure out who owns the policy based on the facts of each individual case. For instance, if the premiums for a whole life policy are fully paid up, then the death benefit, in addition to the cash value, usually gets classified as community property.
In cases like this, disputes may arise over who is the rightful beneficiary. For example, an ex-spouse and a family member of the insured may both file claims for the same death benefit. Insurance companies will frequently pay the originally named beneficiary without consulting relevant family law. If your claim has been wrongfully denied, it’s in your best interest to have an expert evaluate your case.