Divorce Impacts Insurance Coverage Decisions

When a marriage ends in divorce, the parties’ attorneys should address issues relating to life insurance to ensure the parties’ intentions are fulfilled years later when an ex-spouse dies.  For example, the parties can include a provision in the divorce agreement requiring the party paying alimony and/or child support to maintain life insurance for the benefit of the former spouse.  This practice is a common tool to make sure that adequate funds are provided to the former spouse (and/or children) if the insured party passes away during the period when alimony and/or child support would have been owed. Unfortunately, if the divorce agreement does not address life insurance at all or if the language in the agreement is unclear, disputes can arise after the insured former spouse passes away, resulting in the claim being denied or contested by multiple parties.  At Trief, Olk & Dror, our life insurance attorneys see many cases where different parties assert competing claims to the same insurance policy proceeds, such as disputes between children from the first marriage and the second spouse. To avoid such a dispute regarding a life insurance claim, it is important for the attorneys who are handling the divorce to ask about any existing life insurance policies and the extent to which the parties intend for coverage to be maintained in the future for the ex-spouse and/or children; then the parties should take steps to put in place the coverage required and designate beneficiaries to comply with the terms agreed upon.  For example:

• If the party providing child support is obligated to purchase life insurance, that party should make sure that the beneficiary is properly designated to show that the insurance proceeds are paid to an adult (usually the ex-spouse) on behalf of the children;
• Steps should be taken to ensure that the party obtaining the coverage cannot change the beneficiaries without the consent of the party for whom the coverage is maintained;
• The insured should notify the insurance company that payment of any insurance proceeds must comply with the terms of the divorce agreement or court order, and provide a copy of the relevant documentation; and
• If the parties agree that the insured party can reduce the amount of life insurance coverage over time (such as when a child reaches the age of 21 or after a certain amount of alimony has been paid), the language in the divorce agreement should clearly reflect the parties’ understanding as to how such changes can be made and the amount of coverage that must remain.

One mistake that is sometimes made is assuming that a life insurance policy purchased while the couple was married will satisfy the obligation to obtain coverage, without making any changes.  If, however, no changes are made, the outcome could be the opposite of what the couple intended, depending on the law of the state where they reside. In 26 states (including both New Jersey and New York), statutes provide that any life insurance beneficiary designations made prior to the divorce are considered to be revoked when the divorce is finalized, meaning it is as if the designation were never made.  These statutes are based on an assumption that the insured person usually would not want to keep the former spouse as the beneficiary of her life insurance policy but may have neglected to change the beneficiary after the divorce.  Although enforcing these statutes can lead to a result that is the exact opposite of what the parties wanted, the U.S. Supreme Court recently ruled that such statutes can be enforced, even if the statute in question was passed after the parties had divorced (and, thus, at the time of the divorce, they could not have asked their attorneys to plan accordingly).  Sveen v. Melin, 138 S. Ct. 1815, 1822-23 (2018). The best solution for avoiding disputed life insurance claims that arise after a previous divorce is to plan in advance – making sure that the attorneys handling the divorce specifically consider what life insurance coverage should be in place and check to make sure that the beneficiary designations are documented properly to avoid later being undone by operation of state law.  If, however, you do have a dispute relating to life insurance proceeds, the life insurance attorneys at Trief &Olk are available to answer your questions and represent you if life insurance claim has been denied or is disputed by another purported beneficiary.  Feel free to consult our website for examples of the many successes we have had when competing parties contested payment of life insurance benefits or call us directly to discuss how we may help you.