California Beneficiary Laws
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 he or she has any vested interest in the insured.
Complications arise in certain states, such as California, when an insured is married or divorces.
What is a Beneficiary in Life Insurance?
A beneficiary to a life insurance policy is someone who was named by the insured person as the person entitled to receive the death benefits upon the death of the insured.
Who Can Change the Beneficiary on a Life Insurance Policy?
Only the policy owner can change a life insurance beneficiary. Life insurance is a private contract between a policy owner and the life insurance company.
Can a Policy Owner Change the Beneficiary on a Life Insurance Policy to Someone other than his Spouse or Children?
Yes. A policy owner has the right to change the named beneficiary or beneficiaries from his spouse or children to anyone else at any time, even if he is married. However, such a change may or may not be effective according to state law. Most life insurance policies are revocable, meaning the policy owner may change the beneficiary at any time. Some appoint irrevocable beneficiaries, in which case the beneficiary, once designated, cannot be changed.
The Effect of Divorce on Life Insurance Beneficiary Designation in California
Divorce can heavily complicate the process of changing beneficiaries, as explained in our previous post regarding how divorce affects beneficiaries of life insurance policies.
While some states have enacted laws automatically revoking ex-spouses as beneficiaries after divorce, California has not. California, a community property state notorious for having the most complex divorce law in the United States, adds an additional layer of complexity to life insurance and divorce settlements in that if premiums were paid from joint funds, an ex-spouse may be entitled to a payout or death benefits even if not named as beneficiary.
In California, Life Insurance May Be Community Property
California is one of nine (9) community property states in which all property acquired during marriage belongs equally to both parties. 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.
However, the community property rule does apply to policies with an accumulated “cash value,” most often in the form of whole life or universal life policies, provided that the policy was purchased during marriage with community funds. In these cases, the policy’s cash value will be divided 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 change 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.
How Accumulated Cash Value is Divided Varies Greatly in California Divorces
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.
Life Insurance Spouse Beneficiary Rules in California
If the insured dies while married, the portion of the death benefit a spouse will receive when the insured named someone other than the spouse as beneficiary will depend upon how premiums were paid, when the policy was purchased, and what type of policy it is.
Is Term Life Insurance Community Property in California?
Maybe. If the insured purchased term life insurance during the marriage and dies while married, the entire policy is considered community property, giving the spouse 50% of the death benefit if income earned during the marriage was used to pay premiums. The other 50% would go to the named beneficiary.
If the insured purchased term life insurance before the marriage, then married and died while married, the spouse would be entitled to the portion of 50% of the death benefit calculated from how much of the policy premiums were paid before the marriage, and how much were paid after.
For example, if Mary buys a term life insurance policy two years before marrying John in California, then dies a year later, and John finds out Mary named her boyfriend Sam as beneficiary, John is entitled to one-third of 50% of the death benefit and Sam would receive the remainder.
Is Permanent Life Insurance Community Property in California?
Maybe. If the policy in question is a form of permanent life insurance, such as whole life or universal life, again, the spouse is entitled to the portion of 50% of the accumulated cash value according to the amount of premiums paid with income earned during the marriage, even if someone else is named beneficiary.
ERISA Supercedes California Life Insurance Beneficiary Law
If the life insurance policy in question was obtained through employment as a benefit, it is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Employment-obtained life insurance policies are not subject to ERISA if the employment involved the government or a church. One provision of ERISA provides that the named beneficiary is always honored, regardless of the insured’s marital status and who the named beneficiary may be.
In states that have laws automatically invalidating an ex-spouse as life insurance beneficiary, if the policy was a benefit of employment, the ex-spouse remains beneficiary if still named. As explained previously, this is not the case in California.
In California, ERISA may dictate that the death benefit is paid to someone other than the spouse despite community property laws. But because beneficiary disputes are expensive, often the named beneficiary and spouse are willing to settle the matter outside of court with the help of their attorneys.
Consult with an Experienced Life Insurance Beneficiary Lawyer
In cases of divorce or death of the insured, or when the policy is governed by ERISA, when the named beneficiary is not the insured’s spouse, disputes often arise over who is the rightful beneficiary. For example, an ex-spouse and a family member of the insured or the girlfriend or boyfriend of the insured may both file claims for the same death benefit. Who gets paid according to California life insurance beneficiary laws?
In these situations insurance companies will frequently pay the named beneficiary without consulting relevant family law. If your claim has been wrongfully denied because you are not the named beneficiary and you are thinking of contesting the life insurance beneficiary designation, it is in your best interest to have a lawyer concentrating in this area evaluate your case.