Life Insurance & Divorce
November 12th, 2015 by Bunch & Brock
At its best, divorce is a difficult process. At its worst . . . well, we’ve all heard the horror stories. While the term is a legal one for dissolving a marriage, its emotional aspects are usually harder to work through than its legal ones. Spouses who are divorcing tend to focus on immediate concerns such as who will stay in the marital home, who will have primary custody of the kids and who will pay the credit card bill. It’s easy to overlook long-term financial plans, but doing so can leave you in a tricky position. When circumstances change, life insurance beneficiary designations should be reviewed or your objectives may not be met.
Spouses do not have an automatic right to be listed as each other’s life insurance beneficiary. Life insurance is a contract between the policyholder and the insurer, so a husband or wife can name anyone he or she chooses, and the unnamed spouse has no right to claim the life insurance money, except in a community-property state. In cases of divorce where an ex-spouse is named as the beneficiary by mistake because the husband or wife forgot to change it, some states have redesignation laws that automatically revoke the designation retroactively to the time the divorce was finalized. These laws apply only as long as the policy is not part of the divorce agreement or part of an ERISA-governed plan.
Kentucky has a redesignation statute that extinguishes the designation in favor of the divorced spouse in non-ERISA policies. If the insured person dies and the ex-spouse is still named as beneficiary, the proceeds go to the secondary beneficiary or, if there is none, into the deceased’s estate. In states without redesignation laws, the general waiver clauses often found in divorce decrees in which each spouse waives all rights in the property of the other are insufficient to remove the ex-spouse. Instead, any waiver of rights must specifically mention the insurance policy to be effective as to that policy. State redesignation statutes are pre-empted by federal law if the policy is part of an ERISA-governed plan, which holds that benefits must be paid to the named beneficiary.
Relying on state laws to enforce your intentions and protect your “true” beneficiaries simply is not a good idea. Instead, when you go through a major life-changing event, sit down with your attorney, your accountant, and your financial advisor to ensure that your estate plan and beneficiary designations actually reflect your wishes. Basic oversights can have painful consequences for loved ones later on.
The financial professionals at Bunch & Brock can help you reevaluate your estate plan and draft a current one that makes sure your property goes where and to whom you want. To discuss and create the most appropriate strategy for your situation, contact the KY insurance plan attorneys at Bunch & Brock. We have over 35 years of experience helping people navigate the complexities of insurance and estate planning. We are committed to providing each of our clients with a high level of personal service, and we will walk you through each of the steps that must be taken. To schedule an initial consultation, please call 859-254-5522 or fill out this online form.