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Life Insurance, Separation, Divorce & Estate Distribution Rights

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California beneficiary rights from life insurance policies can become even more complex once the analysis includes such factors as whether the life insurance is term insurance or whole life permanent insurance. Term insurance pays only if death occurs during the term of the policy. Whole life or permanent insurance, assuming that the policy is in place, pays a death benefit whenever the person whose life is insured dies.

Many California divorce or dissolution marital settlement agreements (MSAs) are accompanied by life insurance to fund future promises of payments. Until a judge signs off on the MSA and issues a final order, the community property still belongs to both spouses and does not become separate even if the spouses have agreed on how to divide the community assets.

A California MSA often provides that the spouse receiving the death benefit becomes both the owner and the beneficiary of the policy on the life of the ex-spouse. Arrangements other than this can fail if the ex-spouse quits making payments and effectively cancels the life policy and any beneficial rights residing with his or her ex-spouse.

Because beneficiaries cannot be re-designated after the insured's death, it is critical that the beneficiaries be designated in the policy. Complications can easily arise if an insured ex-spouse who was separated or divorced prior to the time of a court-ordered MSA. A common fact pattern (and one that I have seen several times in several variations) is that a married couple without children, John and Mary, decide to separate. At the time of their separation John is insured by a $1 million term life insurance policy and a $500,000 whole life or permanent insurance policy. The whole life policy is fully paid up at the time of the separation. The term insurance policy is paid monthly. John purchased both policies after their marriage. Mary is the identified beneficiary in both policies.

John and Mary, while separated, are in the process of negotiating a marital settlement agreement (MSA). John dies intestate (without a Will or Trust) six months after they separate and prior to a court order on the negotiated MSA. During their separation John changes his designated beneficiary on his term policy but not on his life policy. John's new beneficiary on his term policy is his sister, Pauline.

Pauline, upon petition, is appointed the personal representative of John's Estate by the Sacramento County Superior Court, Probate Division. Mary files a Petition To Determine Distribution Rights in the Probate Court. (California Probate Code Section 11700) and claims an interest in both of John's life insurance policies. Pauline claims an interest in the $1 million term life insurance policy. The Court considers the claims.

The likely outcome:

The whole life permanent insurance is fully paid up at the time of separation. It is a community property asset and the insurance death benefit is properly categorized as a community asset.

While the term policy is purchased with community assets prior to separation. Payments made after separation are made by John alone with his post-separation earnings. Such earnings are separate property pursuant to California Civil Code Section 5118.

The community received everything that it bargained for in the term policy prior to the separation - that is - dollar protection during the marriage paid for with community funds. Since the term policy is renewable monthly and has no cash value if not renewed there is no longer any community property interest in the term policy and no community asset left to divide.

In a somewhat similar but not exact case a Probate Court opined in a tentative ruling that:

"We believe the correct rule to be that term life insurance covering a spouse who remains insurable is community property only for the period beyond the date of separation for which community funds were used to pay the premium. If the insured dies during that period the proceeds of the policy are fully community. Otherwise, the insured remaining insurable, a term policy does not constitute a divisible community asset since the policy is of no value and the community has fully received what it bargained for. [Footnote omitted.]" (Estate of Logan (1987) 191 Cal.App.3d 319, 324-326.)"

I note in closing that every life insurance case related to divorce and separation is different. Different timing and different circumstances abound. An experienced probate attorney and litigator can help you. If you're facing this issue, take the rights steps to prepare: Call Hackard Law today at 916 313-3030.

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