In some states, life insurance is considered community property. To understand the importance of this, it’s a good idea to first define what we mean by community property. We just resolved a community property life insurance dispute with Midland National for $300,000.00.
What Is Community Property with regards to a life insurance claim?
Community property refers to the income and all assets that are acquired throughout a marriage. In this case, partners own and owe everything equally that was acquired during the marriage. If a couple gets divorced in a community property state, all of the income and other assets they acquired during their marriage are split between them equally. This is true even if the asset is only in one partner’s name. For example, Partner A and partner B got married on January 1st, 2015. In 2017, Partner A purchased a house in their name only. In 2018, they got divorced. Despite the fact that the house was only in Partner A’s name, the house is split equally between them if they live in a community property state.
Community Property States for Life Insurance
There are 9 true community property states. Those states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
What Happens To Life Insurance In A Community Property State?
In community property states, life insurance policies are technically owned by both spouses in many cases. Several factors affect this, but one of the primary factors is what type of life insurance policy it is.
- Type Of Life Insurance Policy
For term life insurance, the entire policy and its benefits are considered community property. This means the surviving spouse would have the right to fifty percent of the benefits, even if they aren’t the named beneficiary. The other half of the payout would go to the named beneficiary.
If it’s permanent life insurance, such as a whole or universal life insurance policy, the benefit would be prorated when the insured passes away. The amount the surviving spouse is entitled to depends on how much the insured spent on the policy while they were married, and it would be prorated accordingly.
For example, Partner A purchases life insurance two years before they get married to Partner B. For the first two years, Partner A uses their own money to pay for the policy. Once Partner A and B get married in a community property state, Partner A continues to pay for the policy. However, since Partner A is now married, their income is considered community property. Partner A dies one year later, with a total of 3 years paid into the life insurance policy. Even if Partner A named someone else as the beneficiary, Partner B would be entitled to half of one-third of the payout, or 16.6%. They are only entitled to half of the prorated amount because the other half still technically belongs to Partner A and will get paid out to the named beneficiary.