Divorce can cause a lot of complications in a number of areas of life. One of those areas is estate planning. Take just one estate planning issue: beneficiary designations. These, of course, refer to selections regarding who is to receive the proceeds of life insurance policies and other accounts with beneficiary designations. These assets pass outside of probate, which is an advantage in many ways, but it is important to keep them updated so that the proceeds get to where they are supposed to go when the insured dies.
In California, divorce does not automatically remove an ex-spouse’s right to receive the proceeds of a life insurance policy purchased by their ex. When the insured fails to update the beneficiary designation, an ex-spouse who was named during the marriage as a death beneficiary may later collect proceeds.
This scenario can be avoided when the insured keeps his or her beneficiary designations updated. An alternative way to do it is to ensure that the decree of dissolution specifies that the insured’s ex will not be entitled to the proceeds of a life insurance policy. This can also be done with other accounts with beneficiary designations.
Even when beneficiary designations are updated, though, there may be cases where an ex spouse can have a right to at least some proceeds. An ex-spouse is entitled, for instance, to one half the proceeds of a life insurance policy when the deceased insured named another person as the sole beneficiary and made the last premium payment using marital earnings. When the last premium payment was made using the insured’s own separate property, though, the ex-spouse has no right to any of the proceeds.
Similarly, an ex-spouse maintains an ongoing right to proceeds when a term life insurance policy is renewed after the divorce and the premiums on the renewed policy are discounted because of payments to the original policy. This would be the case only when those payments were made using marital property.
These are not the only possibilities in which an ex-spouse may have a right to proceeds. It is important for those who are concerned about this possibility to work closely with an attorney and financial planner to do what they can to reduce the possibility of an ex-spouse having an ongoing right to life insurance proceeds.
Source: Lake County News, “Estate Planning: Term life insurance issues involving married or divorced insured,” Dennis Fordham, January 25, 2014.