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Characterization Of Term Life Insurance Proceeds as Community Property or Separate Property During Divorce

Posted By Edwin Castellanos || 5-Dec-2013

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 during divorce.

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).

Facts:

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.

Conclusion

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

Categories: Divorce, English

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