How to Divide Life Insurance During Your Los Angeles Divorce?

How to Divide Life Insurance During Your Los Angeles Divorce?

Earlier this week, we published a post on how to divide life insurance in a divorce case in California. We thought we would take a second look and try to give you a better understanding of the conflicting results reached among Judges in California and how a family law court in Los Angeles County may approach this issue during your divorce.

There are two distinct approaches courts in California have developed when dealing with the classification of a term life insurance policy during divorce. The first approach would be to classify a term life insurance policy based upon the policies so-called “economic value.” If you remember our earlier article on classifying term life insurance policies, then you know we discussed that a term life insurance policy does not accrue “cash value” over the life of the policy like a “whole” life insurance policy. When you obtain a “term” policy, in reality no more benefit is received beyond the death benefit. This is the essential difference between “term” and “whole” life insurance policies. So you might ask – how can a court consider a term life insurance policy as having “economic” value when you consider the true nature of a term life insurance policy?

In Marriage of Lorenz (1983), 146 Cal.App.3d 464, 194 Cal.Rptr, 237, the court held that a term life insurance policy really has no cash value and would therefore not be subject to division by the court until the death benefit is paid out. The court made some interesting points as it went on to indicate that there are certain “intangible” property items that cannot be divided during a dissolution of marriage or divorce in California.

No such Monetary value can be place upon the assets claimed here by wife. The mere fact that these assets are of benefit to husband does not compel the conlusion that that benefit must, or can, be divided. We imagine that there are many "assets" held by a spouse at the time of marriage, particularly those arising out of employment, which are not subjec to division. For example an employee may be entitled to use the facilities of a health club owned by his employer, to purchase meals at an employer-owned cafeteria at reduced prices, or to receive a discount for purchases made at an employer-owned retail establishment. An employee may be given the privilege of choosing to work four 10-hour days per week rather than five 8-hour days per week, thus entitling him or her to a three-day weekend. All of these benefits, although of value to the employee spouse, are not convertible into cash. They are therefore, not divisible on dissolution of the marriage. (Marriage of Lorenze (1983), 146 Cal.App.3d 464)"

The notion that certain property items are “intangible” and thus have no real cash value that would subject the asset to division by the court during divorce is in sharp contrast to more recent case law. For instance, more recent case law takes the approach that although it’s difficult to “value” a term life insurance policy on its face, a term life insurance policy does offer more than a mere “expectancy.” If that’s true, then if the insurance policy is paid for using community funds, then it can be said that the spouses have a community property interest for the term of the insurance policy. Later cases seem to emphasize whether the paid-for term has expired at the date of separation and the nature of the renewal right involved. If you would like to take a closer look at how the court’s in California have developed this approach, you may want to read Estate of Logan (1987), 191 Cal.App.3d 319, 236 Cal.Rptr, 368) and Marriage of Spengler (1992), 5 Cal. App4th 288, 6 Cal.Rptr.2d 764).

In California, the general rule regarding the characterization of a term life insurance policy will depend on the source of funding of the premium for the final term of the policy ( Minnesota Mut.Life Ins. Co. v. Ensley (9th Cir. 1999), 174 F. 3d 977). Therefore, the community estate is considered to own the term life policy during the specific term it was acquired with community funds. If you have a term policy on a spouse’s life it is community property only for the period beyond the date of separation where you can establish community funds were used to pay the premium. If an insured spouse dies during that period, then the proceeds would be considered community property in California. Only when a term life insurance policy premium for a new term is proven paid with post-separation property earnings, can the policy then be characterized separate property. (Minnesota Mut. Life Ins. Co. v. Ensley, 174 F.3d at 983).

Absent a right by an insured spouse to enforce a renewal right via contract, that right may not classify as “property” subject to division under community property law in California. Dividing complex assets during your divorce can be complicated. If you are dealing with complicated business or other assets during your divorce, or if you need help understanding how a California court may treat your insurance policy during a dissolution action, contact a divorce attorney in Los Angeles from Castellanos & Associates, APLC today at (323) 655-2105.