When gearing up for a divorce, don't just check all of the beneficiary designations — make sure you're aware of how state laws will affect life insurance death benefits.
Scrutiny of beneficiary designations amid a divorce sounds like a no-brainer, but attorneys have pointed out that some states will bar the payment of proceeds of life insurance when a couple is partaking in a divorce. Colorado is one such state, according to Joan E. Boros, an attorney at Stradley Ronon.
Other jurisdictions not only permit carriers to not pay out, but they allow insurers to block off that individual's access to the policy assets, barring him or her from taking a loan on cash value.
A recent
legal blog post by Michael P. Sampson, an attorney at Carlton Fields Jorden Burt, covered such a change in Florida, which will now permit those assets to pass as if a decedent's ex had passed away first, in the event the decedent failed to delist the now-ex as a beneficiary.
“[Advisers] need to see if there are any statutes like the one in Florida,” Mr. Sampson said. “In absence of a statute, an ex-wife or ex-husband can be a beneficiary in a way that wasn't intended after the divorce.”
KNOW STATE LAWS
In the Sunshine State, Florida legislators updated the state code in 2012, giving life insurers greater certainty over how to proceed when a divorcee lists an ex as a beneficiary. In that case, the carrier can review the dead person's marital status on the death certificate, as well as his relationship to the beneficiary in order to determine who to pay.
A listing of “single,” “divorced” or “married” to someone other than the beneficiary, means that an insurer in Florida can pay a secondary beneficiary instead, according to Mr. Sampson.
(More: Consider these tax consequences when splitting assets in a divorce)
Exceptions apply, however. For instance, if a final judgment of dissolution calls for the decedent to hold onto the life insurance asset for the benefit of the ex or children from that marriage — and no other assets that would fulfill that benefit exist on the person's death — then the designated beneficiary won't be treated as predeceasing the dead ex.
Other jurisdictions have different details. Divorce won't undo a beneficiary designation in Kansas and Indiana, but in Missouri, one spouse will have to rename the ex as a beneficiary if the spouse intends to support the ex with the policy proceeds,
according to a paper from The Bar Plan, a provider of liability insurance for attorneys.
In the event where state law and beneficiary designations in light of divorce become foggy, life insurers can file
an interpleader case, leaving it up to a state court to determine who receives which benefits.
CHECK ENTITLEMENTS
In the case of a divorce, it's easy for clients to assume that they're receiving survivor benefits even after a split. Lauren Prince, owner of Prince Financial Advisory and certified divorce financial analyst, ran into a situation like this with a client — only this involved rights to an ailing former spouse's pension benefits after death. The client contacted Ms. Prince fairly late in the divorce.
“The husband was in receipt of the pension payments as a single life, and it was supposed to have been joint and survivor,” Ms. Prince said. “The soon-to-be ex thought she'd be entitled to some pension payments if he died. But he had changed it,” she added.
The client wound up making up for those expected benefits using other assets.
(More: Understanding Social Security rules for divorced spouses)
The situation is different from an example involving life insurance, as the split of pension benefits requires that a divorce decree use a qualified domestic relations order to those benefits.
Nonetheless, it's a primary example of why advisers would do well to double-check beneficiary designations, reconcile them with what would be in the divorce agreement and what's in state law, and make sure those benefits are distributed as planned.
“Don't assume anything, and always check and see what your entitlements are,” Ms. Prince warned. “Check your beneficiaries and make sure they haven't changed, and that the forms are correctly filled out to get those benefits before the divorce agreement is signed.”
