When filing a life insurance claim, many policyholders and beneficiaries are unaware of the complexities that community property laws can introduce. In California, community property laws can play a significant role in determining how life insurance benefits are distributed when the policy is purchased during a marriage and the married couple live in a community property state such as California. Understanding how these laws impact life insurance proceeds is crucial whether you are a policyholder, beneficiary, or dealing with a contested claim.

5 Facts About the Relationship Between Community Property and Life Insurance in California

Life insurance might seem like a simple concept. You purchase a policy and make all the required premium payments. If you or the insured party passes away, the named beneficiaries receive the contracted cash benefits.

However, life insurance is not always straightforward, and policies often come with many caveats and requirements. The same is true for accidental death and dismemberment claims and almost any other type of insurance policy. Understanding how the policy itself may impact the distribution of life insurance death benefits is critical, as is knowing when and how federal or state laws may impact your rights or benefits.

In California, one factor that can impact life insurance claims is community property laws. California is a community property state, meaning that assets acquired during a marriage are generally considered jointly owned by both spouses. This principle applies to life insurance policies purchased with marital funds. However, various factors, including divorce, separate property designations, and federal ERISA law, can complicate how life insurance benefits are ultimately distributed.

1. Life Insurance Acquired During a Marriage Is Community Property

Life insurance you purchase during a marriage is often considered community property in California. That is especially true if the life insurance premiums were paid for with marital assets. Thus, if a life insurance policy is purchased during a marriage and premiums on that policy are paid for using community funds, California law generally considers the life insurance policy to be community property. This means that both spouses have an equal ownership interest in the policy.

Issues can arise when the policyholder designates a beneficiary other than their spouse without obtaining the spouse’s consent. In such cases, a surviving spouse may be able to challenge the beneficiary designation and argue that he or she is entitled to their community property share of the proceeds. Courts will often examine the source of funds used to pay for the policy and whether the beneficiary designation violated community property laws.

This fact is most relevant in cases involving a term life policy or a life policy that accumulates cash value, such as a universal or whole life insurance policy. If such a policy is purchased during marriage and premiums are paid with community property funds, both spouses have a right to the policy’s cash value even if one spouse purchased the policy or only one person is named as a beneficiary. Moreover, concerning a term life policy that has a death benefit, a spouse who paid premiums with community property may have a claim of up to 50% of the death benefit even if he or she is not the named beneficiary.

2. Divorce Does Not Automatically Revoke Spousal Beneficiary Designations

Many family breadwinners purchase life insurance policies and name their spouses as the beneficiaries with the intent that the policies will help cover day-to-day expenses or pay off homes if the worst should happen. If a couple gets divorced, it might seem logical that the life insurance beneficiary would change. However, divorce does not automatically revoke an ex-spouse’s beneficiary designation in California.

If you get divorced and want to ensure that life insurance policy benefits go to someone other than your ex-spouse, you must change the beneficiary designation and have the ex-spouse disclaim the proceeds in a divorce settlement agreement. If this is not done, the life insurance policy will likely be deemed community property to the extent the premiums were paid with community property funds, even if the ex-spouse is not a beneficiary. Whether or not you change the beneficiary needs to be discussed as part of that process.

Consider a hypothetical example to understand how this type of situation can become complex. Imagine that Max and Eileen were married for 10 years. During their first year of marriage, they buy a whole life insurance policy on Max. By the time they get divorced, the policy’s cash value is $50,000. Max and Eileen may negotiate to divide the cash value equally through divorce. Or, they might decide that Max will continue to pay the premiums and Eileen will continue as the beneficiary as part of a spousal support agreement. Another option might be for Eileen to agree to give up any stake in the policy and for Max to change the beneficiary designation to someone else.

The outcomes can vary widely, but it is essential to understand that life insurance policies must be considered during divorce proceedings.

3. If Someone Outside of the Marriage Purchases a Policy, the Benefits Might Not Be Community Property

Not all life insurance policies are affected by community property laws. If spouses purchase a life insurance policy with marital funds but do not live in a community property state, the policy will not be considered community property. Or, if an individual purchases a life insurance policy before marriage and continues to pay the premiums with separate funds, the policy is generally considered separate property. Similarly, if a third party—such as a parent or business partner—purchases a policy on a married individual, the proceeds typically do not become subject to community property claims even if the married couple lives in a community property state.

However, disputes can still arise if premiums are paid using a mix of separate and community funds. In such cases, courts may use a tracing analysis to determine the proportion of the policy considered community property versus separate property.

But, if separate property proceeds are commingled with community property and those commingled funds are used to pay for a life insurance policy, the policy benefits can become community property.

4. ERISA Law Can Supersede Some California Laws About Beneficiaries and Community Property

One important caveat to California’s community property rules is the potential impact of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA governs many employer-sponsored life insurance policies and can preempt and supersede state laws regarding beneficiary designations and community property interests. If you have an employer-sponsored life insurance policy or are the beneficiary of one, you should know that ERISA generally requires that the named beneficiary of the policy must be honored regardless of whether a policyholder is married and has named someone other than their spouse, unless there is what is known as a QDRO (Qualified Domestic Relations Order) that supersedes the beneficiary designation.

A QDRO is a court-ordered legal document created after a divorce that splits and changes ownership rights related to a retirement plan or insurance policy to give the divorced spouse their share of the policy or pension plan. A QDRO can be used to designate a specific individual as the beneficiary of life insurance benefits, even if a different beneficiary is named in the policy itself.
The need to consider the impact of ERISA is not unique to life insurance. In California, retirement benefits are often community property, but ERISA rules might also impact beneficiary considerations on these assets.

When You Might Want Legal Help With a Life Insurance Claim

Getting legal help to protect your rights and support your access to life insurance benefits can be a good idea. You should contact experienced life insurance lawyers if you believe an insurance company has wrongly denied a claim or delayed payment. You should also contact an experienced life insurance lawyer if multiple people claim a right to share in the policy benefits.

The team at McKennon Law Group PC is highly experienced in handling life insurance claims and we fight aggressively to assert your rights and protect your interests in disputes with insurance companies. Contact us at 949-504-5381 for help with your life insurance claim dispute.