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Are Life Insurance Proceeds Marital Property?

Friday, April 26, 2024

While life insurance can be a great tool for financial planning, it’s often a thorny issue when it comes to divorce or contested inheritance.

Absent clear pre- or post-nuptial agreements, a myriad of state laws and other factors control whether a life insurance policy is considered a marital asset. The outcome can be especially significant for an active permanent life insurance policy – a type of life insurance policy that carries cash value. 

In this article, we’ll answer some common questions about whether you can lose life insurance in divorce. We’ll also touch on many of the legal, financial, and personal considerations you should incorporate into your estate planning.

To start, the question of marital property assumes you’re interested in learning about how life insurance proceeds are divided during a divorce. Generally, if you have no plans to separate, your spouse will benefit from a life insurance policy’s tax-advantaged cash value or death payout. In other cases, life insurance goes to the insured’s estate after death or could be bound up in probate.

But how are life insurance policies handled in divorce? Can someone dispute the beneficiary of a life insurance policy? Does divorce terminate life insurance beneficiary? We’ll answer these questions and more. 

As we dive in, keep in mind we’re insurance experts – not attorneys. Divorce can be stressful and complicated even without the complexity of dividing life insurance proceeds. If you’re in this situation, we highly recommend you consult with both a financial planner as well as a lawyer, in addition to talking with your insurer about plan-specific rules. 

Caveats of Life Insurance As An Asset In Divorce 

Looking at the broad landscape of marital property and life insurance proceeds or payouts, there are a number of caveats to keep in mind. For starters, assets in marriage and divorce could be covered by a prenup. If you didn’t sign a prenuptial agreement, how life insurance is handled in divorce will be largely left up to state and federal laws. 

There’s no single way to answer whether your ex-wife or ex-husband is entitled to your life insurance as state laws vary widely. For example, in community property states (there are nine), a life insurance policy will almost certainly be subject to distribution in a divorce if the couple paid premiums with joint funds while married. There are also revocation upon divorce statutes that could impact whether an ex-spouse receives a payout from term life insurance in the event of death.

Federal law, too, brings another caveat. For instance, group insurance (like an employer-paid term life insurance policy), policies for military service members, and federal employee plans usually are treated differently in cases of divorce. Generally, due to the Employee Retirement Income Security Act, an ex-spouse likely is entitled to life insurance money derived from these policies.

Man signing a paper

Interpretation of the Law

In a divorce, a judge will interpret relevant laws and apply those to your case. The decree generated by this process ultimately decides how life insurance proceeds are divided. Let’s take a closer look at a few common circumstances:

  • Constructive trusts: A court might require one spouse to buy or continue life insurance if there’s child support or alimony ordered. Alternatively, the supporting spouse might be required to utilize a constructive trust where assets are held in order to benefit the recipient (ex-spouse or dependent) after death.
  • Affidavits of coverage: In all cases, a judge’s objective is to rule on the division of assets, including life insurance policies in a divorce. State laws dictate how each party will list financial information. In some jurisdictions, a sworn statement of life insurance policies and the associated value are required in a separate affidavit that must accompany the initial divorce filing.
  • Community property: If permanent life insurance coverage began while the marriage was intact, the policy’s cash value is subject to marital property rules. In states with community property laws, the asset is divided equally. In non-community property states, a judge must determine if the life insurance was “commingled” and should be shared in divorce. While interpretation can vary, if a spouse was the original beneficiary or joint funds paid the premiums, the life insurance is an asset to be divided in divorce. However, for term life insurance (the most common type) there’s no cash value or dividend to call an asset. In this case, while there’s nothing to divvy up, state laws have varying applications on whether an ex-spouse remains a death benefit beneficiary post-divorce.
  • Revocation upon death: Once a divorce is final, if an ex-spouse is still listed as a life insurance beneficiary, some states automatically invalidate the benefit. This is called revocation upon death. South Carolina is one of about half of the states in the U.S. with a law stipulating this. Most commonly this comes into play when an ex-spouse forgets to list another beneficiary on a term life insurance policy that couldn’t be distributed during the divorce. Revocation laws prevent an ex-spouse from claiming part or all of a death benefit when the insured spouse dies.

When a couple divorces, life insurance can become a contentious issue. What was once a practical and strategic estate planning tool can wreak havoc on one’s emotions and end up centerstage in court. There’s a good chance a permanent life insurance policy will end up being divided as marital property in a divorce. Of course, there’s also a good chance that that circumstance was furthest from your mind when you first took out the policy. After a divorce, also finding the right life insurance can be an important part of overall financial stability. 

No matter what stage of life you’re in, we’re here to help. At Independent Insurance Associates, we can help you find coverage for all your insurance needs – from home and auto policies to whole life insurance. Call us today to speak to one of our agents for a free quote.