Understanding Divorce’s Impact on Potential Life Insurance Benefits

Typically, when policyholders purchase insurance such as life insurance, disability insurance, or accidental death and dismemberment insurance, they name one or more beneficiaries to receive benefits under the Policy. A beneficiary is the person who receives the policy benefit payout upon a qualifying event. In the case of life insurance, a benefit is paid if the covered insured passes away in a manner that is covered under the policy.

Many married persons make their spouse the sole beneficiary of these types of policies. That can be true even if the couple has children, as the expectation is that a surviving spouse would use the benefit payout to care for the children too.

However, what happens in this situation if the marriage is over through a divorce and the life insurance policy or the accidental death and dismemberment policy names the divorced spouse as the beneficiary at the time of the insured’s death? Our insurance attorneys can help.

No Automatic Beneficiary Change

It is critical to understand that California law and the law in most states do not automatically effect a change upon divorce. That means that a divorce decree does not automatically remove an ex-spouse as a beneficiary on these policies even if the insured would have wanted the removal of the ex-spouse but did not change the beneficiary designation before he passed away.

Typically, if an insured wants a divorce decree to remove his or her spouse as a designated beneficiary, that must be spelled out clearly in the language of the divorce decree/agreement. Couples who are going through a divorce may want to discuss these types of details with their divorce attorneys and with a knowledgeable insurance lawyer. If you have previously gone through a divorce and this type of detail was not included in the decree, you may want to talk to your insurance agent about options for changing beneficiary designations.

Life Insurance Can Be Considered Community Property

Another critical factor that can impact how life insurance policies and payouts work after a divorce is the fact that these types of policies might be considered community property. If you or your spouse purchased the policy during your marriage—and particularly if you paid the premiums for the policy with communal assets—the policy is likely to be considered community property during a divorce.

This can be an important consideration, as it can drastically change the total value you get from the policy. Consider a hypothetical example where a husband purchases a policy on his own life and names his wife as beneficiary. The policy is for $1 million in benefits, and when the couple gets divorced, the cash value in the policy is $100,000.

One potential outcome in the case is that the court decides the policy is community property. It may award ownership of the policy to the husband but require him to give up $50,000 in cash assets to ensure equitable distribution of the current cash value. At that time, the husband could change the beneficiary on the policy, and the ex-wife is potentially out a million dollars later in life.

The Requirement for One Spouse to Maintain a Life Insurance Policy With the Other Spouse as Beneficiary

In some cases, courts may order or the parties may agree that one spouse to carry life insurance in the future for a specific time, for a specific amount, and that another divorcing spouse is named as a sole or partial beneficiary. This might occur when one spouse makes a lot more money and has been the de facto breadwinner in the family. A life insurance policy can help ensure that child support and other dependent needs are covered if the insured spouse passes away.

Updating Your Life Insurance Policies

Divorced spouses likely will want to make changes to your life insurance policy. They should talk with their insurance agent and their divorce attorneys involved before they move ahead with those changes. They will want to ensure that they are making legal, intelligent changes so there is less likelihood that the changes might be called into question later. That is true even if you are only updating your beneficiary designations.

What to Do if You Run Into Problems With a Life Insurance Claim Post Divorce

Many people think of life insurance as a fairly straightforward purchase. You buy the coverage, and if you pass away while the coverage is still in force, your beneficiary receives a cash benefit. Unfortunately, it does not always work as simply as you might think it should.

There are many reasons that an insurance company might balk at processing a payout. After all, the insurance company has a bottom line to protect, and paying out every claim that is filed is not the way to do that. If an insurance company can find a legal reason to deny a claim, you can count on the fact that it will do so.

Any time there are extra mitigating factors, such as potential questions about who a beneficiary might be or whether a beneficiary change was legal, it can hold up a payout or even put a claim in jeopardy.

If you believe you are the rightful beneficiary for a life insurance policy and the insurance company is not acting in good faith or is otherwise failing to pay the claim, you may need additional help. Experienced life insurance and accidental death insurance lawyers who understand these issues can fight to protect your rights and increase the chance that you get the benefits you deserve.

For more information about how we can help you, contact us today. The McKennon Law Group PC has fought many life insurance companies and we have been highly successful.