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Most life insurance policies will pay out the death benefit to the named beneficiaries after the policyholder’s demise. However, in community property states, the policyholder’s spouse is automatically considered the beneficiary.

Much to your surprise, you find out that someone else is the beneficiary on your spouse’s life insurance policy.

As a husband or wife, don’t you have an automatic right to the life insurance money? It’s a tricky question, and the answer is: It depends.

Generally, the policy owner — who is also usually the person who pays the premiums — can name anyone he or she chooses as beneficiary.

Besides naming a spouse as beneficiary, a policyholder could choose another family member, such as an adult child, a business partner or even a boyfriend or girlfriend outside the marriage. There’s a tax trap if you have three different people named as the policy owner, the insured and the beneficiary.

Insurance companies don’t make moral judgments about who is named as beneficiary. They simply pay out the money when the beneficiary submits a claim.

Life insurance is a contract between the owner of the policy and the insurance carrier,” says Donald Goldberg, division vice president of AEPG Wealth Strategies in Warren, NJ.

Key Takeaways

  • The policy owner can choose anyone to become the beneficiary of his/her life insurance policy.
  • In a community property state, both spouses own the money equally earned during the marriage and any property bought with that money.
  • Term insurance policy is also considered a community property and your spouse gets 50% of the death benefit.
  • Some states automatically revoke beneficiary designations to ex-spouses when a couple get divorced.

Can a spouse override a beneficiary on a life insurance policy?

Usually, a spouse has no right to claim the life insurance money if someone else is named as beneficiary — except in a community property state. Those states are:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Additionally, Alaska and Tennessee are considered “opt-in states.” Spouses can decide to opt-in and participate in the state’s community-property laws.

In a community property state, spouses equally own any income earned during the marriage and any property purchased with that income. That includes life insurance policies.

In Washington state, for instance, if a spouse uses “community property” to pay the life insurance premiums, their spouse has the right to a portion of the life insurance proceeds. The extent to which the life insurance is considered community property depends on the type of policy, says Karolyn Hicks, a litigator with Stokes Lawrence, a law firm in Seattle.

Are life insurance proceeds marital property?

A life insurance policy may be a marital asset. It depends on the state laws that control the policy and if the policy is subject to federal, state and community property law.

If it is, and it is a term life insurance plan, the entire policy is considered community property — which would give the spouse the right to 50% of the death benefit — if income earned during the marriage was used to pay the last premium. The other 50% would go to the named beneficiary.

With permanent life insurance, such as whole life or universal life, the proceeds are prorated according to the percentage of premiums paid with “community” money.

For example, a spouse buys a whole life policy two years before marriage. They use their money to pay for the first two years of premiums. They then pay the policy with income earned after the wedding to pay for another year, and then they die. In this case, if they name someone else as beneficiary, their spouse would have rights to 50% of one-third of the death benefit payout, Hicks says.

What are life insurance beneficiary rules for spouses?

A life insurance beneficiary is legally entitled to receive the proceeds of a life insurance policy after the insured person’s death. The rules governing life insurance beneficiaries vary from state to state, but some general rules apply. In community property states, a spouse is automatically considered the life insurance beneficiary unless they indicate explicitly otherwise in the policy. All property acquired during the marriage is considered jointly owned by both spouses, regardless of who earned it or whose name is on the title.

However, life insurance beneficiaries can be any person that the policyholder chooses to name on the policy, as long as there is a financial reason for them to be listed. This could include children, parents, siblings, friends, or even a charity or other organization. 

Is your spouse automatically your beneficiary on life insurance?

If you live in a community property state, your life insurance payout will automatically go to your spouse, even if you have named someone else the beneficiary. This is because the state considers you and your spouse to be equal owners of all joint assets, such as income earned during the marriage, property purchased with the money earned and life insurance benefits.

But if you don’t live in a community property state, then your spouse doesn’t automatically receive the benefit. In some cases, a policyholder can name someone else the beneficiary such as their child, relative or some person other than their spouse. 

What happens if you forget to remove your ex-spouse as a beneficiary?

Sometimes an ex-spouse is named as the beneficiary by mistake if the policyholder forgot to change the beneficiary after the divorce.

Some states have laws that automatically revoke beneficiary designations to ex-spouses once the divorce is final unless the policy is part of a divorce agreement. If the insured person dies and the ex-spouse is still named as beneficiary, the proceeds go to the secondary beneficiary; if there isn’t a secondary beneficiary, they generally go into the deceased’s estate. This protects current spouses from oversights. But those state laws are preempted if the coverage is through an employer-sponsored plan governed by federal law.

Can you add someone else as a beneficiary other than a spouse?

What if you want to leave the entire death benefit to someone other than your spouse? In community property states, that raises various issues about community property rights to the policy’s benefit, says Katie Groblewski, a Stokes Lawrence estate planning attorney.

Groblewski says that in certain instances, it may make sense for spouses to sign a “property status agreement.” The agreement states that the life insurance policy is separate, rather than community, property. In addition, in some instances, the insurer may require the non-insured spouse to sign a consent form to waive rights to the death benefits. The requirements to create a “property status agreement” vary by state.

However, without the property status agreement, a spouse’s waiver to their community property right to half of the death benefit could be deemed a gift from that spouse to the policy beneficiary.

“This ‘deemed gift’ could have unintended gift or estate tax consequences to the surviving spouse,” Groblewski says.

Beneficiary decisions can be complicated, particularly for blended families with children from more than one marriage.

“It’s imperative to coordinate beneficiary designations with an overall estate plan,” Groblewski says. “An estate attorney is probably the one attorney every person should see.”

Final thoughts

Simple oversights can have painful consequences for loved ones later.

“Don’t rely on state laws to protect you because they can’t protect you in all cases,” Ruttenberg says.

It pays to double-check your policies. Goldberg says when he meets with new clients, he reviews their beneficiary designations, even when clients say everything is up-to-date.

“Every once in a while, they’re mistaken and an ex-spouse is named,” he says.

Jason Holloway, a Stokes Lawrence family law attorney, encourages clients to communicate with their families about estate decisions and life insurance beneficiaries, although he acknowledges that’s not always easy.

“You’re talking about money, about dying and [in some cases] divorce.” Still, he says, “I try to encourage clients to have conversations with their families.”

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Shivani Gite
Contributing Writer

 
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Shivani Gite is a personal finance and insurance writer with a degree in journalism and mass communication. She is passionate about making insurance topics easy to understand for people and helping them make better financial decisions.

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