If you are the owner or beneficiary of a life insurance policy issued in Texas, it is important to understand your rights under the policy. Keep reading and contact the life insurance lawyers at the Boonswang Law Firm with any questions you may have.
Who can be a life insurance beneficiary in Texas?
Anyone can be a life insurance beneficiary, including family members, friends, organizations, corporations, and trusts. This is because life insurance is a “non-testamentary asset.” In other words, life insurance proceeds are not controlled by a will. Instead, an insurance policy is a contract between an insurance company and a policyholder, and the insurer must only pay the beneficiary listed in the contract.
In some circumstances, however, the insurer cannot (or should not) pay the named beneficiary, and the life insurance beneficiary can be contested. These circumstances are explained below.
How Life Insurance Pays the Death Benefit
- Named beneficiary. The insurer will first try to pay the beneficiary whom the insured named on the policy.
- Alternate (or contingent) beneficiary. If the named beneficiary is not valid, the life insurance company will pay the benefit to the alternate beneficiary (also known as a contingent beneficiary) whom the insured named in the policy.
- Insured’s estate. When no named beneficiary or alternate beneficiary is available, the insurer will typically pay the death benefit to the insured’s estate. This information will be in the policy. An estate is distributed according to the insured’s will.
- Intestate succession laws. If the insured dies with no beneficiaries and no will, the insured’s estate (including their death benefits) will be distributed according to intestate succession laws. These laws are found in the Texas Probate Code.
Spouses and ex-spouses
Life insurance beneficiary rules for spouses and ex-spouses vary by state. The Texas code contains a divorce revocation statute. This statute applies when an insured designates his or her spouse as beneficiary and the couple later divorces. If the couple divorces, the ex-spouse is automatically no longer the beneficiary upon divorce.
There are three (3) exceptions to this rule:
The divorce decree states that the ex-spouse must remain the beneficiary. When a couple gets divorced, the court may require one or both spouses to maintain a life insurance policy with the ex-spouse as beneficiary. This may serve as a form of alimony or child support.
The insured re-designates the ex-spouse as the beneficiary after the divorce. If the insured affirmatively re-names a former spouse as beneficiary (such as by completing a beneficiary change form provided by the insurer), the ex-spouse is entitled to the proceeds. Re-designation cannot occur simply by inaction; even if the insured does not designate a new beneficiary following divorce, the ex-spouse is not a valid beneficiary by default. Proceeds will be paid to the alternate beneficiary.
A former spouse is designated as trustee for a minor beneficiary. When the named beneficiary is a minor, the proceeds are placed in the care of an adult trustee. In many cases, a policyholder may choose a child as beneficiary. This child’s other parent may be the insured’s ex-spouse. If the child becomes entitled to the proceeds before they reach the age of majority, the former spouse may be the child’s trustee until the child reaches adulthood.
ERISA Life Insurance Beneficiary Designations Rules after Divorce
If the life insurance policy was acquired as a benefit of employment, it is likely to be governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Policies under ERISA are governed by ERISA-based federal law. In a life insurance claim dispute, federal law will supersede state law.
ERISA strictly follows the beneficiary designations in the policy. This means that if an ex-spouse is designated beneficiary under an ERISA-governed policy, the ex-spouse is considered the valid recipient of the death benefit (even if that would not have been the wishes of the insured.) Federal law strictly adheres to this rule to make it easier to consistently apply this federal law.
Life Insurance and Community Property in Texas
Texas is a community property state. In community property states, property obtained during the marriage with shared finances (“community funds”) is considered community property. (Anything obtained with strictly personal funds, such as items purchased before the marriage, are “separate property.”) Community property is owned jointly by both spouses.
In the context of life insurance, a life insurance policy purchased during a marriage is community property. A policy is community property because it is paid into with community funds and the surviving spouse will have a community property claim. There are two major types of life insurance policies, and they are each affected by community property laws in different ways:
- Term-life policy. A term-life policy is a policy in effect for a set number of years, such as a ten-year period. If this policy is paid for by community funds, it is community property and your spouse is entitled to the proceeds. However, if your Texas term-life insurance was established during a previous marriage, this policy may be community property from a past marriage and your ex-spouse may be entitled to one-half.
- Whole-life policy. A whole-life policy is in effect until your death, and premiums are continuously paid. If this policy is paid for by community funds, it is community property and your spouse is entitled to the proceeds. If your whole-life policy was established during a previous marriage, your ex-spouse may be entitled to the proceeds according to the percentage of the premiums paid with community funds from your previous marriage.
A policy issued to you when you are single is your separate property and is not subject to Texas community property rules. You are not required to make your spouse the beneficiary, and your spouse does not have to approve your beneficiary designation. However, your spouse may be entitled to a percentage of the proceeds if any of the premiums are paid with community funds.
Can a life insurance beneficiary be contested?
In limited circumstances, a person other than the designated beneficiary may have a claim to death benefits and can challenge the life insurance beneficiary designation.
Did the insured attempt to change the beneficiary?
If you have evidence that the insured attempted to change the beneficiary, you may have a valid claim. Sometimes, an insured individual might attempt to change their beneficiary, but make a mistake in the process. For example, if the insured has another child, the insured may wish to add that child as a beneficiary. The insured may complete the insurance company’s Beneficiary Change Form (available from the insurer upon request), but perhaps he forgot to sign the form.
While some states require full compliance for beneficiary designation changes to be effective, Texas follows the doctrine of “substantial compliance.” This means that if the insured took all of the reasonable steps necessary to comply with the insurance company’s beneficiary change procedure, the court will recognize the beneficiary change as valid. If you believe that your loved one substantially completed the steps to change their beneficiary, you may have a valid claim.
Was the insured coerced or influenced to change a beneficiary designation?
If you have solid evidence that your loved one was subject to undue influence or lacked the mental capacity to make a designation when he changed the beneficiary, you may have a claim. For example, if the insured was subject to threats or coercion, a beneficiary change is not valid. One common circumstance occurs when the insured is suffering from a disease such as dementia, and a dishonest relative or caretaker encourages the insured to change their beneficiary.
Any time an individual takes advantage of the insured’s vulnerable state, a beneficiary designation will not be valid if the insured did not make the change by his own free will.
Contesting a life insurance beneficiary is difficult. Insurance companies are careful about beneficiary disputes, and will often leave a beneficiary claim for a court to decide. If you are considering contesting a beneficiary designation, you will require the guidance of experienced professionals. Contact the life insurance attorneys at the Boonswang Law Firm if you have any questions regarding life insurance beneficiaries.