If your client is divorced, there’s an extra reason to make sure their elections are up-to-date.
We’ve talked about policy reviews before – in fact, our October sales kit was all about ways to maximize this important opportunity with clients. Here’s another reason to make the effort to check in, especially at the end of the year. It has to do with beneficiary designations – and the chance that your client’s wishes might not be honored by their state.
The Issue: Revocation Upon Divorce
In many cases, a client’s divorce decree will address what should happen with each spouse’s life insurance policy. But life insurance can fall through the cracks if no child support or alimony is involved, or if either spouse owns a term life policy. (Without cash value, a term life policy wouldn’t be considered a financial asset during the discovery process.)
Why does this matter?
Currently, 26 states have laws automatically revoking a divorced spouse as a life insurance beneficiary when the insured passes away.
These states assume the deceased never got around to updating their beneficiary(ies) and wouldn’t want the death benefit to go to their ex. If their ex is named as the primary beneficiary, that person’s contingent beneficiaries automatically become the new primary beneficiaries. If that person didn’t name any contingent beneficiaries, the death benefit would be paid to the estate, which must then go through probate.
Sveen v. Melin
The U.S. Supreme Court had to weigh in on this issue, thanks to a contentious case in Minnesota. In that case, an insured man died in 2011 with a life insurance policy that named his ex-wife as beneficiary and his two children from a prior marriage as contingent beneficiaries. In Minnesota, an ex-spouse is automatically revoked as a beneficiary when the insured passes away. However, when both the man’s ex-wife and the children filed claims for the death benefit, the case went all the way to the Supreme Court.
Most divorcees do not aspire to enrich their former partners.
The Supreme Court’s 2018 8-1 majority opinion stated, “Although there are exceptions, most divorcees do not aspire to enrich their former partners. (And that is true even when an ex-spouse has custody of shared children, given the many ways to provide them with independent support.)” The Supreme Court ruled that the state’s automatic revocation upon divorce was indeed constitutional. As the opinion stated, the Court believed most deceased policyowners left their ex on the policy as “the result of neglect than choice.” (Source: APA.org)
But every client’s situation is different – and what if they do want their ex to remain a beneficiary?
States with Automatic Revocation Upon Divorce
As of 2023, 24 states leave pre-divorce beneficiary designations in place. But these 26 states automatically revoke them:
- Alabama
- Alaska
- Arizona
- Colorado
- Florida
- Hawaii
- Idaho
- Iowa
- Massachusetts
- Michigan
- Minnesota
- Montana
- Nevada
- New Jersey
- New Mexico
- New York
- North Dakota
- Ohio
- Pennsylvania
- South Carolina
- South Dakota
- Texas
- Utah
- Virginia
- Washington
- Wisconsin
If you have divorced clients in these states, it’s worth taking the time to ask about their beneficiary status.
For example, if your divorced client is co-parenting with an ex, they may still want to leave that ex money through the death benefit. Although it’s not ideal, some clients use this as a cheaper, easier way to leave their child’s remaining parent cash instead of creating a trust. If that’s what your client wants, they may need to take an extra step to make sure this happens.
- If your client wants their divorced spouse to remain a beneficiary: They should submit a new beneficiary designation, re-naming their ex as a beneficiary. The post-divorce date on the new designation acts as verification that they want their ex to remain included (this is called “redesignation”). The new designation should also include contingent beneficiaries as a precaution.
- If your client wants to remove their divorced spouse as a beneficiary: They should submit a new beneficiary designation that includes primary and contingent beneficiaries who are not their ex.
Keep in mind that state revocation will not apply to a group life policy your client had through work. Those policies are governed by ERISA (employee benefit) law, which means the state revocation would not apply even in one of the states listed above. ERISA law gives precedence to the group policy’s procedure for naming beneficiaries, which means the most recent designation form would be honored.
