Determining a Former Spouse's Entitlement to Life Insurance Proceeds

Previously, I co-authored a piece on the challenges surrounding life insurance beneficiary designations post-divorce. With the issue still sparking significant legal debates, it's time to revisit and update our understanding.

Beneficiary Designations Are A Common Oversight

Everyone wants their financial affairs in order when they die, yet this is often not the case, particularly with life insurance beneficiaries. Unfortunately, people often take a set it and forget it approach. A common oversight is failing to change the beneficiary after a divorce, leading to legal battles over whether the insured intended their ex-spouse to receive their life insurance proceeds.

In the past 25 years, many states have stepped in, enacting "revocation-on-divorce" statutes that automatically remove a former spouse as a life insurance beneficiary without any action needed from the insured. However, some states still rely on common law, which often interprets the insured’s failure to change the beneficiary as an intention to keep the ex-spouse as the beneficiary. Another wrinkle is an employer-sponsored life insurance plan governed by ERISA, which holds the insured’s beneficiary designation governs unless certain exceptions apply.

An Insured’s Divorce Presents Lingering, Intertwined Legal Issues

Legal issues often arise when an insured dies and the ex-spouse remains the life insurance beneficiary. Courts usually look to marital property agreements to determine if the former spouse's interest was released. While this should present a simple answer, court often have to grapple with ERISA-governed plans, whether revocation-on-divorce statutes apply at all or, possibly retroactively, and situations where a divorce occurs in one state and the insured dies in another.

If a former spouse remains the designated beneficiary, conflicts can arise among the deceased’s former spouse, new spouse, current love interest, children, trust, and estate. State laws, divorce decrees, and property settlements must be considered, along with each spouse’s state of domicile before and after divorce. Legal and claims personnel should coordinate before paying any benefits, often opting for an interpleader as the safest course of action.

States aim to uphold the insured’s presumed intent. While common law traditionally didn’t change beneficiary designations after divorce, modern statutes presume the average person doesn’t want their ex inheriting their life insurance. Many states follow the Uniform Probate Code, which revokes a former spouse’s beneficiary status upon divorce, assuming inattention rather than intention if the insured doesn’t update their beneficiary designation.

Revocation-on-divorce statutes often include exceptions for court orders or marital agreements requiring the ex-spouse to remain the beneficiary. Some even allow beneficiary status to be reinstated if the insured remarries the former spouse. However, many states lack such statutes, arguing that not changing the beneficiary reflects an intent to keep the ex-spouse as the beneficiary.

Check Federal and State Statutes, Agreements, And Choice of Law

Federal law can preempt state statutes, particularly with policies governed by ERISA, which prioritize uniform plan administration over state variations. When federal preemption is not an issue, courts then turn to common law principles of contract interpretation, especially in states without revocation statutes.

Since California lacks a revocation statute, carriers who issue policies in California face reoccurring challenges when an ex-spouse remains a policy beneficiary.. Here, general language in a marital settlement agreement doesn’t typically revoke an ex-spouse’s beneficiary status unless explicitly stated. Even when an agreement references life insurance, it usually only identifies a benefit amount, not a specific policy, leaving it to the insurer to resolve whether the insurance referenced is the policy it issued. Similar challenges exist in states like Kentucky and Oregon, where specific contract language is crucial to determine the intent.

A recently enacted state divorce revocation statutes adds complexity as the question may arise as to whether it retroactively applies to a divorce the pre-dates the statute ?The Supreme Court’s decision in Sveen v. Melin upheld the retroactive application of Minnesota’s revocation statute, reflecting a policyholders’ probable intent to remove an ex. Contrarily, some states, like Illinois and Nebraska, have ruled against retroactive application, adhering to the statutes’ effective dates and the insured’s prior contractual agreements.

Choice of law issues further complicate matters, particularly when policies are issued in one state, divorces occur in another, and the insured dies elsewhere. Courts may use the "most significant relationship" test to determine applicable law, often leading to different outcomes for individual and group policies.

In essence, while revocation-on-divorce statutes aim to simplify the process, their application varies widely, and legal disputes often hinge on specific contract language and state interpretations, making this area of law continually evolving, complex and fact specific.