During marriage, a very typical scenario is for spouses to name each other as the beneficiary to each person’s individual life insurance policy. Once a divorce is commenced, a beneficiary designation cannot be changed until after the divorce is completed. After the divorce, the only way to change the beneficiary designation is if the divorce decree sets forth who owns the policy and whether or not the now-former spouse is to remain as the beneficiary. Unless this is specified the life insurance company may prevent a change, leaving the former spouse as the beneficiary to the death benefits.
A Scenario to Learn From
Consider this example. A famous business executive has been divorced for five years. He had a multi-million dollar term life insurance policy that he purchased during his marriage, payable to his wife (now his ex-wife). The divorce attorneys did not list the life insurance policy as an asset of the marriage in the final divorce judgment (divorce decree). The parties and lawyers discussed the fact that husband was not required to keep the life insurance for his wife’s benefit, but for some reason, the judgment did not specify his intention about the policy. After the divorce, the executive continued to pay the premium on the policy, and never thought to change the beneficiary from his ex-wife to someone else. Then, he became ill with cancer. In putting his legal and financial affairs in order, he decided he would now change the beneficiary of his life insurance policy to his sister. When he contacted his insurance company, he learned he could not change the beneficiary.
The Law & the Insurance Company
In community property states like California, most, if not all, life insurance companies require that the spouse sign off on the policy after a divorce or that a copy of the divorce judgment be attached to the change of beneficiary form. The divorce papers must clearly state to whom the policy was awarded. In the previous example, the executive’s marriage dissolution papers did not mention the insurance and therefore his ex-spouse’s signature would have been required to change the beneficiary request form. Obviously if the ex-spouse signs the consent, there is no problem. But, what if the ex-spouse refuses, knowing that because of the insured’s terminal illness the insurance policy will soon pay a benefit?
Assuming, as in this scenario, that the parties and lawyers knew the policy existed and simply failed to provide for its disposition in the divorce judgment, it is highly likely the proceeds will belong to the ex-wife upon her ex-husband’s death. While this seems harsh, California law specifically states that a divorce judgment alone is not sufficient to change or terminate beneficiary designations. The law sets forth the following notice to parties:
“Dissolution or annulment of your marriage may automatically cancel your spouse’s rights under your will, trust, retirement benefit plan, power of attorney, pay on death bank account, transfer on death vehicle registration, survivorship rights to any property owned in joint tenancy, and any other similar thing. It does not automatically cancel your spouse’s rights as beneficiary of your life insurance policy. If these are not the results that you want, you must change your will, trust, account agreement, or other similar document to reflect your actual wishes.
Dissolution or annulment of your marriage may also automatically cancel your rights under your spouse’s will, trust, retirement benefit plan, power of attorney, pay on death bank account, transfer on death vehicle registration, and survivorship rights to any property owned in joint tenancy, and any other similar thing. It does not automatically cancel your rights as beneficiary of your spouse’s life insurance policy.”
Therefore, the divorce judgment itself does not automatically cancel a spouse’s right as the beneficiary of a life insurance policy. To remove the ex-spouse as the beneficiary, the insurance company will require that spouse’s consent or a clearly worded divorce judgment setting forth who owns the insurance policy, who shall be the beneficiary, or who has the right to designate the beneficiary. Unless this is done, do not assume a court will remedy the oversight. It is best to address the ownership and beneficiary of all insurance policies, even term life insurance policies, in the divorce judgment.