In California, there is a difference of opinion on the characterization
of term life insurance policies during
divorce. When attempting to characterize term life insurance proceeds, it is helpful
to understand the basic difference between a “whole” life
insurance policy and a “term” life insurance policy.
In a “whole” life insurance policy, we typically think in terms
of a “living benefit” because the policy provides not only
for the payment of a death benefit but it also provides for the build
up of cash value over the life of the policy. In comparison, the purpose
of a term life insurance policy is to protect against the contingency
of the insured’s death during the term of the policy.
Term life insurance only provides for the life insurance coverage and does
not offer anything beyond the death benefit. For example, think about
a health or auto insurance policy. If you do not pay to renew the policy
at the end of the term, the term life insurance policy simply terminates.
Term life insurance policies also contain a right to renew the term policy
for future terms without having to prove medical eligibility all over again.
California Courts of Appeal have disagreed over the legal significance
of a term life insurance policy’s fixed term and the lack of cash
surrender value typically associated with a whole life insurance policy.
The courts in California have reached conflicting results on whether term
life insurance policies and renewal rights make the policy susceptible
to characterization as “community property” subject to division
In the Court of Appeal of the State of California, Fifth Appellate District,
the court recently held that characterization of a term life insurance
policy “will depend on the…premium for the final term of
the policy. (
In Re Marriage of Burwell, F064265M (Cal. Ct. App. 2013).
In 1996, during the marriage, Husband and Wife purchased a term life insurance
policy. Husband was the insured on the policy. Wife was the named beneficiary.
The Husband and Wife separated in 2004. Based upon the standard temporary
restraining orders, the spouses were prohibited from encumbering the policy,
cancelling it or changing the designated beneficiary on the policy.
In 2005, a status only judgment of marital dissolution was entered. Husband
remarries in 2006. In 2008, a stipulated further judgment dealt with some
property issues but there were other issues reserved for trial. The stipulation
to entry of this judgment had warranted that the former spouses had made
full property disclosures although Husband had failed to list the policy
on his preliminary and final declarations of disclosure in the divorce.
He did refer to it in a deposition.
In 2008, Husband changed the beneficiary from Wife to his new spouse. In
April 2010, Husband committed suicide. Thereafter, Wife filed a civil
action to prevent the term life policy’s proceeds from going to
his surviving spouse. Wife also filed a probate action to obtain letters
of administration for Husband’s estate.
The trial court found that Husband failed to disclose the insurance policy
and violated his fiduciary duties to his former spouse. The court considered
the policy an omitted community asset under California Family Code Section
2556. Wife argued that she was entitled to receive 100% of the proceeds
from the insurance policy. Wife had acknowledged that she was aware of
the policy, but assumed that Husband had let the policy lapse. Husband’s
action to change the beneficiary was void.
The court ordered one-half of the $1million in proceeds to be distributed
to Wife and the other half of the proceeds to Husband’s estate.
Court of Appeals Examines Factors to Characterize Term Life Insurance Proceeds
The California Court of Appeals stated that, “The proper characterization
of term life insurance proceeds will depend on a number of factors. The
proceeds are entirely separate property when: (1) a separate estate has
paid the final premium with separate funds; and (2) the insured spouse
was insurable at the end of the last term paid for by community funds;
and (3) either (a) the insured spouse’s health was such that he
or she could have purchased a comparable policy at a comparable price
when the separate estate began paying the premiums, or (b) the policy
did not contain a premium cap when the separate estate began paying the
premiums. The proceeds are part community and part separate where (1)
the separate estate has paid the final premium with funds that are part
community and part separate; or (2) the insured spouse has become medically
uninsurable before he or she began paying the premiums with separate property;
or (3) the insured spouse could not have purchased a comparable policy
at a comparable price when he or she began paying the premiums with separate property.
Generally, characterization of a term insurance policy will turn on the
source of funds of the premium for the final term of the policy. In Burwell,
the Court held that the term life insurance policy proceeds cannot be
characterized on the trial court record. As a result, the Court of Appeals
remanded the matter back to the trial court for further proceedings.
If you have complex property and business assets to divide during your
divorce, it is important to have a consult with a
family law attorney that can help you understand how a court might distribute those
assets between you and your spouse. Give us a call today at (323) 655-2105.
We look forward to helping you!
Cite: In Re Marriage of Burwell, 13 DJDAR 14623, 10/31/13