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Who Gets The Life Insurance? Not The Ex-Spouse, States Say

It’s rare that the U.S. Supreme Court decides a case with immediate impact on an advisor’s daily activities, but that is exactly what happened on June 11, 2018.

That was the day the court validated a Minnesota statute that retroactively revoked a life insurance beneficiary designation because the beneficiary was the former spouse of the insured. Yes, you read that correctly — the statute retroactively revoked a beneficiary designation due to a divorce.

Here is why statutes like the one in Minnesota have much more far-reaching ramifications than advisors may anticipate, and how advisors may address the resulting errors and omissions concerns.

The facts of the case are routine. A couple marries. The husband names his wife as beneficiary on his life insurance. They divorce. The divorce decree does not mention the life insurance policy and, years later, the husband dies without ever changing the beneficiary. Under a so-called divorce revocation statute, the former spouse is treated as pre-deceasing the insured. As a result, the contingent beneficiary takes the death proceeds. There are few exceptions to this, even if the statute is passed after the divorce.

About half the states have statutes such as this, and these statutes affect revocable non-probate beneficiary designations, not just life insurance. Each statute is different. Although they have similarities, the specifics of each statute are important, as they can change the outcome.

For example, all the statutes of which we are aware contain an exception if the divorce decree requires the insured to maintain the coverage for the benefit of the spouse. Two other common exceptions are if the divorced spouse owns the policy, or if the divorced spouse pays the premium on the policy. But states often have provisions that are particular to that state.

The state statutes are often relatively new, so advisors may not be familiar with them. And, in a state where the statute is new, the courts may not have interpreted the statute yet, so there has not been the publicity that results from news of recent cases. Since cases take years to wind themselves through the appellate system, there may be little if any case law in a particular state.

Although we all can read what a statute says, the case law is important because we don’t know what the statute’s particular language means until a court tells us. The courts also interpret what the statute was intended to accomplish. So, case law provides the framework within which we can knowledgeably advise clients. But there are more complexities than the statutes themselves, as there is often a question of which state law applies to a particular case.

Let’s illustrate this by adding the following facts to the commonplace scenario described at the beginning of this article. Assume that the policy is purchased while the insured/policy owner lives in Kansas, that the insured later moves to Alabama and gets divorced. And let’s assume he later marries again, lives with his second wife in Alabama, and dies in Georgia. Assume further that the primary beneficiary (former spouse) lives in Georgia.

Alabama has a divorce revocation statute for non-probate assets, such as life insurance. Neither Kansas nor Georgia has a divorce revocation statute.

Advisors often think that the law of the place of sale is the controlling law. In some states, like Alabama and Georgia, that is a good assumption. But state courts still may apply the laws of their own state for any number of reasons. In the scenario described previously, the Alabama Supreme Court recently applied the laws of Alabama, on the grounds that to apply another state’s differing law would violate Alabama public policy. The important point, then, is that we often do not know what state law will apply.

What To Tell A Divorced Client

What is an advisor to do in such an unpredictable climate? We have several suggestions.

One is to advise a divorced client to revisit all revocable beneficiary designations, as these statutes usually apply to all such designations, not just on life insurance. For example, beneficiary designations of a non-qualified plan may be affected. The client can be contacted in writing, by telephone or — even better — a telephone call followed up by a letter (with proof of delivery) or email (with delivery and read delivery receipts). Since neither an advisor nor an insurer may give legal advice, the advisor should recommend that the client seek legal counsel to determine the best course. If the client is in the process of securing a divorce, this issue should be raised with the client’s divorce lawyer. These simple actions should help alleviate errors and omissions concerns in these cases.

Interestingly, the advisor’s relationship with the client may heighten the advisor’s responsibilities. For example, the more the advisor is involved with a client, such as with annual planning meetings, the more liability the advisor may have. Sometimes even what is written on a business card may trigger a greater duty toward the client.

In addition to revisiting beneficiary designations, the client’s attorney may recommend refiling a beneficiary designation, even if that beneficiary is required under a divorce decree. The reasoning is that the post-divorce renaming of the former spouse alleviates the questions raised by a non-probate divorce revocation statute. This step should make things easier later on, for both the deceased’s family, as well as the named beneficiary.

So here are two questions for an advisor: 1) Do you have a client who has been divorced, or is contemplating divorce? 2) Do you know whether a non-probate divorce revocation statute may affect the eventual payment of death proceeds? The advisor should know the answer to the first question. But the answer to the second question is often not readily discernible, even to an attorney. As a result, we recommend obtaining legal advice.

The failure to address these issues may wreak havoc with well-thought-out estate plans, not to mention open a possible errors and omissions issue.

Douglas I. Friedman serves life and health insurers as a trusted resource on marketing practices, regulatory compliance requirements, and the development and introduction of new insurance products. His firm acts as national counsel for estate and business [email protected].

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