Property division is a key issue in most divorces, along with spousal support and child custody and support. Making a property inventory will likely be among your first tasks as you start your divorce. One possible type of property to be included in your property division may be a life insurance policy.
There are several types of life insurance policies, and not every policy presents property division issues. The laws in your state can make a difference in how life insurance policies will be treated in your divorce. Finally, the facts in your case can matter when it comes to dividing interests in a policy.
Insurance Type and Property Interests
There are basically two kinds of life insurance: term life and whole life. A term life policy insures against someone's death for a set period, and ends. Contrast this to a whole life policy that has investment qualities, builds cash value, and generally won't expire once the premiums are paid up.
Term life insurance generally isn't treated as marital or community property – there's no surrender or loan value. A whole life policy with a cash surrender value can be treated as marital or community property.
Even if a life insurance policy isn't an asset you need to include in your property division, make changes as needed. Changing your beneficiary may be important given the life change of your divorce. It's a detail that is also easy to overlook, and you don't want a current and former spouse left fighting over who is truly entitled to your policy's proceeds. Terms of your separation or divorce decree may require one spouse to keep a policy in force and name the other spouse or a child as a beneficiary.
State Law, Divorce and Life Insurance
Most often it is a whole life insurance policy with a cash value that is at issue in the property division in a divorce. The "value" in a term life policy may be limited to the power to renew it for another term.
Life insurance can be characterized as separate or marital property (in an equitable distribution state), or as separate or community property (in a community property state). Generally, a life insurance policy bought before marriage and paid for with separate funds remains separate property. Conversely, a policy purchased during marriage is entirely marital or community property if all premiums are paid with marital or community funds.
Problems may come up when policy premiums were paid partly with separate and shared funds. These issues don't come up too often, but several cases in community property states can give you an idea on how a court might treat an insurance policy dispute:
Inception of Title View
In this approach, the original character of a life insurance policy when it was issued controls. The source of later premium payments doesn't matter. For example, your separate property policy you bought before marriage remains your separate property. You may have to repay premiums paid with marital or community funds, however.
This approach makes a pro rata split in a life insurance policy based on the source of funds used to pay the premiums. For example, there may be separate and community interests in a whole life policy you bought before marriage. While some premiums were paid with your separate funds, there's a community property interest too, based on premiums paid after marriage and the policy's appreciation in value during the marriage.
Annual Policy Theory
The annual theory applies to term life insurance policies. A term policy is viewed as a set of annual insurance contracts. Insurance proceeds are characterized based on the source for the last premium paid.
Your divorce lawyer can give you the best guidance on how any given insurance policy will factor into the property division in your divorce.
Questions for Your Attorney
- Our term life policies give us the option to extend them. Can I ask that my spouse must extend his policy and name our children as beneficiaries?
- If I have an interest in my spouse's whole life policy, does that interest include the death benefit?
- How is a policy valued? Is it based on cash value, premiums paid and other factors?
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