Life insurance and divorce

A divorce does not automatically end your life insurance, and it does not always remove your ex-spouse as beneficiary. Whether your ex still collects depends on your state's law, on whether the policy came through an employer, and on what your divorce decree says. The safest approach is to settle each policy in the divorce itself and then change the paperwork, because the insurance company pays whoever its records name.

Why divorce raises life insurance questions

A marriage often involves coverage that protects the other spouse or shared children. Divorce leaves open questions that the decree may or may not answer:

• Who owns each policy and who pays the premiums?
• Should one spouse keep insuring the other to secure child support or alimony?
• Who is the beneficiary today, and who should it be?
• Does coverage the employer gave your spouse still cover you?

Each question has a different answer depending on whether the policy is individual or group, term or permanent.

Court-ordered life insurance

Courts and settlement agreements commonly require a paying spouse to carry life insurance so that child support, alimony or a property settlement is protected if that spouse dies. A decree usually spells out:

• The minimum death benefit, often tied to the remaining support obligation, which can shrink over time.
• Who the beneficiary must be: the former spouse, the children, or a trust for the children.
• How long the requirement lasts, such as until the youngest child turns 18 or finishes college.
• Proof of coverage, such as an annual statement or a right to be notified if premiums go unpaid.

A level term policy sized to the support obligation is a common way to meet an order, since it costs far less than permanent coverage for the same death benefit. Match the term to the order: a 15-year support obligation needs at least a 15-year term. If the decree names your children, a minor cannot receive proceeds directly, so use a trust or custodian; see naming a minor child as life insurance beneficiary and naming a trust as your life insurance beneficiary.

The person who benefits from the order can take extra steps. Some agreements make the former spouse the policy owner, so the owner can pay premiums and keep the policy from lapsing, or give that person an irrevocable beneficiary status that prevents a change without consent. A lapse notice sent to the former spouse is another common protection. These terms are negotiated, so ask your attorney which ones fit your case.

If you break the order, the remedy is in family court, not with the insurance company. A former spouse may be able to claim against the estate for the unpaid amount, but that is slower and less certain than having the policy in force.

Revocation-on-divorce laws

Many states have a revocation-on-divorce statute. Under these laws, a divorce automatically cancels the designation of a former spouse as beneficiary, and the proceeds are paid as if the ex-spouse had died before you. The details vary by state: what counts as a revocation (divorce, annulment), whether the law applies to life insurance as well as wills, whether in-laws and relatives of the ex are also removed, and whether a law passed after you named your ex applies to that older designation.

On that last point, the Supreme Court held in Sveen v. Melin (2018) that Minnesota could apply its revocation-on-divorce law to a life insurance beneficiary designation made before the law took effect, rejecting a Contract Clause challenge.

These statutes are a safety net, not a plan. Several things can defeat them:

1. Your state has no such law, or its law does not cover the type of asset in question.
2. The policy is governed by ERISA, discussed below.
3. The decree or policy says otherwise, for example by requiring you to keep your ex as beneficiary.
4. You re-named your ex after the divorce. A new designation made later generally controls.

Because the rules differ, the divorce and your ex as beneficiary: revocation-on-divorce laws guide covers state law in more detail. Do not rely on a statute when a short form can make your wishes unmistakable.

Employer coverage: ERISA can override state law

Group life insurance offered through a private employer is usually governed by the federal Employee Retirement Income Security Act (ERISA). In Egelhoff v. Egelhoff (2001), the Supreme Court held that ERISA preempts a state revocation-on-divorce statute for ERISA plans, so the plan must pay the person named in the plan records even if state law would have removed the ex-spouse.

The Court went further in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (2009), a retirement plan case: a waiver of benefits written into a divorce decree did not override the beneficiary named in the plan's records, because the plan administrator must follow plan documents. The same reasoning is applied to employer life insurance. The practical lesson is blunt: for a policy through work, change the beneficiary on the plan's own form after the divorce, and do not count on the decree or state law to do it. Governmental and church plans fall outside ERISA, so different rules can apply. Employer life insurance, ERISA and beneficiary disputes covers how these disputes play out.

Also check what the divorce does to coverage itself. A former spouse generally can no longer be covered as a dependent under your employer's plan, and your ex-spouse loses coverage you had on them. Ask the employer's benefits office whether a conversion or portability option is available; see keeping group life insurance when you leave a job.

Who owns the policy

Individual policies have an owner, who may or may not be the insured. In a divorce, ownership is part of the property settlement. Cash value in a permanent policy is an asset that may be valued and divided; term insurance has no cash value and is usually just kept or replaced. Transfers between spouses or because of a divorce are generally tax-free under federal law, and the transfer-for-value rule has an exception for them, but confirm your situation with a tax professional before moving a policy. See transferring ownership of a life insurance policy and policy owner vs insured: why it matters.

A caution for the person who hopes to keep a policy on their ex: the owner must keep paying premiums, and the insurer will not tell the owner if the insured's health or circumstances change. You can also only insure a person with insurable interest: who can buy life insurance on whom and consent; in a divorce, a former spouse who holds a court-ordered interest generally satisfies that.

Community property states

If you live in a community property state, premiums paid during the marriage with marital earnings can give the other spouse an interest in the policy's value, even if only one name is on it. community property states and life insurance explains the rule and the nine states IRS Publication 555 lists as community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

After the divorce: a checklist

1. List every policy on both lives: individual, group, and any rider or credit policy.
2. Read the decree and settlement agreement for required coverage, amount, duration and beneficiary.
3. Decide ownership of each policy and have the transfer documented in writing.
4. Get a copy of the current beneficiary designation for each policy.
5. Change beneficiaries on the insurer's or plan's form; see how to change your life insurance beneficiary. Name a contingent beneficiary too.
6. Buy replacement coverage if you need to insure children or an obligation. Use the How much life insurance do I need? to size it, and see life insurance for single parents.
7. Update your will and any trusts.
8. Keep proof of coverage in a place your executor and former spouse's attorney can reach.

Key takeaways

• Divorce does not by itself guarantee your ex is removed as beneficiary; change the designation yourself.
• State revocation-on-divorce laws help for individual policies, and Sveen v. Melin (2018) upheld applying them to older designations, but they may not apply to employer plans.
• For ERISA plans, Egelhoff v. Egelhoff (2001) means the plan's records control over state law, so update the plan's form.
• Court-ordered coverage should be written with an amount, term, beneficiary and proof of coverage, and matched to the support obligation.
• Settle ownership and premium payment for each policy in the divorce agreement, and check tax effects with a professional.