It’s not surprising that when most married people obtain a life insurance policy, they name their spouse as their sole beneficiary. After all, it’s natural for a person to want to make sure their spouse is financially secure after they pass away.
Unfortunately, nearly half of all marriages end in divorce. Of those, many marriages end with exceptionally bitter feelings. When that occurs, a person who was once very concerned with their spouse’s financial security can become equally interested in making sure that person receives none of their assets.
To the extent people even think about their life insurance policies at all during this difficult time, their natural inclination is to change their policy beneficiary. Sometimes, however, this instinct runs contrary to the law. This article explores a couple of ways that divorce can impact life insurance and one’s own freedom to choose a beneficiary.
Financial restraining orders
Some states are highly protective of individuals experiencing a divorce. In fact, states like Massachusetts issue a legal document called a “financial restraining order” the moment a couple files for divorce. Among other things, the financial restraining order prohibits a divorcing spouse from changing the beneficiary in his or her life insurance policy.
Of course, there’s no requirement that a policyholder notify his life insurance company when he files for divorce. In fact, notwithstanding the financial restraining order, many people fill out a Change of Beneficiary form right away. While their sneaky tactics may feel good in the moment, they are unlikely to have the desired effect.
That’s because if a person dies while the financial restraining order is in place, the life insurance company is very likely to receive claim submissions from the former spouse and the new beneficiary. When a life insurer receives two arguably valid claims at one time, there’s only one thing they can do – take everybody to court.
Known as an action in “interpleader,” the life insurance company basically sues everybody involved in the dispute and asks the court to figure out who it should pay. As you can imagine, this can be both costly and emotionally exhaustive for the policyholder’s intended beneficiary. This is especially true given that courts generally honor the financial restraining order and award policy benefits to the former spouse.
The moral of this story, of course, is that despite one’s wishes and best intentions, it is never a good idea to thwart a court order. If you are getting a divorce in a state that issues financial restraining orders, talk to your lawyer about either contesting the financial restraining order or wait until that order is lifted before you change your beneficiary.
Another thing that can happen within the context of a divorce is that the final divorce decree prohibits a divorcing spouse from changing his or her beneficiary. These sorts of orders are typically issued in cases where the divorcing couple has children. Many times, in fact, the divorce decree prohibits a life insurance policyholder from changing his beneficiary until the couple’s children reach the age of 18 or 21.
Once again, the policyholder’s life insurance company has no reason to know that the insured has gotten a divorce or that a divorce decree impacts the policy. Thus, it is no surprise that when a policyholder ignores a divorce decree, changes his beneficiary, and then dies shortly thereafter, the insurance company receives death payout claims from the former spouse and the new beneficiary. Typically, the only solution to this dilemma is for the insurer to file an action in interpleader so the court can figure out which beneficiary will get paid. That’s expensive for everyone.
In one particularly interesting case, a divorce decree mandated that the former husband, Joe, keep his ex-wife Kathy as his life insurance beneficiary until their son reached the age of 18. Recognizing that his son’s 18th birthday was just around the corner and wanting to take care of several financial tasks before he headed out on a 13-week trip around the world, Joe changed his beneficiary to his new wife, Jan, just two weeks before his son turned 18.
Sadly, Joe was killed in a car accident one week later. Technically, Joe had violated the divorce decree by changing his beneficiary before his son’s birthday. Equity would dictate, however, that Jan should reap the benefits of the death payout given the proximity of the trigger date for a valid change. Perhaps predictably, the insurance company filed an action in interpleader so the court could determine who to pay. Jan wisely hired an attorney specializing in life insurance claim denials.
Ultimately, the attorney convinced all of the parties to go to mediation. There, they worked out a settlement where Jan received the bulk of the death benefit while Kathy received a nominal sum that reflected the week or so that she had left as Joe’s beneficiary. It was actually a very good result for Jan as she was not legally allowed to be named as Joe’s beneficiary at the time of his death.
That last case is a good example of why it is important to seek a specialized attorney any time you are facing a specialized legal issue. As lawyers who specialize in the wrongful denial of life insurance claims, we’re fortunate to see how our years of knowledge and experience can be a true game changer for our clients.If you have recently received a claim denial letter in the mail and you aren’t quite sure the life insurance company’s decision is correct, please do not hesitate to contact our firm. We’ll provide you with a free consultation where we give an honest assessment of your situation. If we agree that the life insurer did you wrong, we’ll take on your case with no out-of-pocket payments from you. In fact, you’ll never pay our firm a dime unless and until you recover money from the life insurer. Give us a call today. We’re here to help and we have a strong track record of success.