Life Insurance and Divorce: The Law of Unintended Consequences

By Lane V. Erickson, Idaho Estate Planning Attorney

For many people, life insurance is just one of the several pieces they have as part of their written estate plan. We encourage our clients to consider life insurance and how it can be helpful to their estate or to their family members and loved ones they may leave behind. For individuals who do not have a sizeable estate, life insurance may be one of the very best ways they can provide for their spouse or other family members. However, as with all parts of estate planning, it is vitally important that each individual keep their life insurance updated based on the current circumstances of their life. When any part of a person’s estate plan, including life insurance, is not kept updated, this can lead to severe unintended consequences.

For more than 70 years, our premier team of Idaho estate planning attorneys have assisted numerous clients in creating their estate plan and in helping to keep it updated. When we assist clients with their estate planning, we also always talk with them about life insurance and other types of benefits that may exist that should also be regularly updated.

The Idaho estate planning lawyers on our team consist of partners Randy Budge and Lane Erickson and attorneys Nathan Palmer and Dave Bagley. Each of the lawyers on our team have received the highest ratings for their ethics and legal abilities in helping their clients reach their goals. We know we can help you with all of your estate planning needs including making sure your estate plan accomplishes what you want even when your life or circumstances have changed.

One of the major changes that can occur in a person’s life is divorce. When divorce occurs, the structure of an individual’s family changes dramatically. These changes go deeper than just the changing relationships that may have happened as a result of a divorce. Rather, these changes include the actual legal status and how portions of your estate are legally transferred, after you pass away. The good news is that there are statutes in Idaho that protect your written estate plan when a divorce occurs, which includes your last will and testament, your durable power of attorney, your living will, and your power of attorney for health care. In other words, if you list a spouse in any or all of these documents, and then you are divorced, the statutes will protect your written estate plan by removing your divorced spouse from these documents.

However, it’s important to understand that these statutes do not have an impact on life insurance. The purpose of this article is to talk about why life insurance is different and to discuss the things that you should do to make sure that if a divorce has occurred, you keep your life insurance updated regularly.

The first thing that you should understand is that your life insurance is not controlled by your last will and testament. If you have specifically listed an individual as a beneficiary of your life insurance, that person will continue to be listed as the beneficiary on your life insurance regardless of what your last will and testament says.

In other words, let’s suppose that in your life insurance you name your spouse as your beneficiary. A few years down the road you could get divorced. You realize that you should make a change so you write a last will and testament which declares that your life insurance will now go to your kids rather than to your spouse. In this instance, the life insurance controls, and the last will and testament does not.

The only time that you’re written last will and testament will control who receives your life insurance is when you do not list a beneficiary in the life insurance documents themselves. When this happens, your life insurance then becomes an asset of your estate which is controlled by your written last will and testament. In other words, the life insurance company will pay the proceeds of your life insurance to the estate rather than paying it directly to a named beneficiary and your will controls who receives your estate.

Even though your last will and testament may not control how your life insurance is distributed, a written divorce decree could control it. During a divorce, the Court enters an order that is known as a divorce decree. The divorce decree is a document where the Court has specifically stated what exactly the divorcing couple are required to do. The divorce decree could contain information about child custody, child support payments, spousal support payments, and also about life insurance.

If the divorce decree indicates that the divorcing husband is still required to list the divorcing wife as the beneficiary of a life insurance policy, then the divorcing husband is required to follow that Court order. If the divorcing husband changes the life insurance beneficiaries without informing the Court or the divorcing wife, the divorcing wife may still be able to force the life insurance company to pay the proceeds over to the spouse due to the written divorce decree.

Because of this, it is important for divorcing spouses to be very clear in the written divorce decree about what happens with life insurance. If the divorce decree does not mention the life insurance, then the divorcing spouse who owns the life insurance policy is entitled and legally able to make any changes to it that they want.

The final thing that you should understand is that life insurance is a written contract. In fact, the contract exists between the person who purchased the life insurance and life insurance company. Because of this, the life insurance company is only required to follow the terms and conditions that are in the contract that they are bound by.

The person who purchases the life insurance contract has the ability to change the beneficiaries of a life insurance anytime they want. The beneficiary designation form is part of the written contract that the life insurance company is bound by. As a result, even if the life insurance company doesn’t want to make a payment to a beneficiary, they are still required to do so because of the terms of the written contract.

Because of everything we’ve listed above, if you own a life insurance contract where you have listed a spouse, and you then go through a divorce, we encourage you to review your life insurance contract and to make any changes there that need to be made. If you do not make a change and your ex-spouse continues to be the named beneficiary of your life insurance contract, that ex-spouse will be entitled to receive the life insurance proceeds after you die even if you don’t want them to.

If you have any questions about your life insurance, or how your life insurance is a part of your estate plan, we can help. We have assisted numerous clients yeah making sure that their life insurance and their estate plan is updated after a divorce. We are confident that we can help you too!

Our team of Idaho lawyers can help you with any of your estate planning or probate needs. Whether you are seeking to create or review an estate plan for yourself or would like to help a loved one, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877-232-6101 or 208-232-6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho Estate Planning problems.