Protect life insurance upon death

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After months of wrangling over property upon divorce, an ex-spouse could still end up with a windfall where his former wife inadvertently failed to remove him as her designated life insurance beneficiary. Language in a carefully drafted marital settlement agreement might avoid this result; however, parties to a divorce should still be advised to change their policy designations immediately upon divorce.

In Richard v. Martindale, No. 09 CV 4159 (N.D. Ill. June 14, 2010), the parties divorced after 22 years of marriage, but the husband never removed his ex-wife as a beneficiary of his $50,000 life insurance policy.

His sons, who were the named successor beneficiaries, sued for the proceeds, claiming that the ex-wife waived her right in the parties’ marital settlement agreement, which was incorporated into their divorce judgment. The federal district court agreed with the sons and held that the waiver in the divorce judgment was sufficiently specific to bar the ex-wife from collecting the life insurance proceeds upon her former husband’s death.

The Richard judgment stated that each party waived “all rights, interests, expectancies and beneficial interests he or she now has or would have upon the death of the other party.” The judgment also provided that any contrary provision in a previously executed beneficiary designation or other legal instrument was overridden by such waiver. In the court’s opinion, this specific, unambiguous language was sufficient to override the ex-husband’s beneficiary designation in his life insurance policy and he did not have to take further steps to remove his ex-wife as a beneficiary for his sons to take the $50,000.

Not all successor beneficiaries have had the same fortune. There are plenty of cases in Illinois where the dissolution judgment was not carefully drafted and no steps were taken to change the beneficiary designation in a life insurance policy or pension fund. In these cases, the ex-spouse, not the decedent’s children, received the proceeds or benefits.

In In re Marriage of Myers, 257 Ill.App.3d 560 (1st Dist. 1993), at the time of divorce, the husband’s pension was in pay status and his wife and daughter were the named beneficiaries. The marital settlement agreement stated that each party “waives any right to the property in the other’s possession.”

The husband died two weeks after the divorce and the wife and daughter began receiving the pension payments.

The executor of the estate argued that the wife had no right in the pension fund and had waived her right to it in the marital settlement agreement.

The wife argued that the marital settlement agreement did not specifically refer to the pension fund and, thus, did not represent a waiver of her right to the pension fund. The appellate court agreed, holding that “a spouse named as a beneficiary in a pension fund, profit sharing plan or insurance policy has an expectancy interest, which may be defeated in a dissolution agreement but that the dissolution agreement must be a clear expression of the spouse’s surrender of that interest.” In Myers it was not a clear expression.

Similarly, in O’Toole v. Central Laborers’ Pension & Welfare Funds, 12 Ill.App.3d 995 (3d Dist. 1973), the dissolution judgment stated that each party was barred as to all property claims of the other; however, it did not contain a specific provision concerning life insurance.

Upon the husband’s death, his ex-wife was still the named beneficiary of his life insurance policy. The appellate court held that the divorce agreement did not expressly extinguish the wife’s beneficial interest and, therefore, she was entitled to the life insurance proceeds.

Had the agreement expressly stated that the wife waived her interest in any life insurance policy or other beneficial interest in any previously executed legal instrument, the result would have been different. Principal Mutual Life Ins. Co. v. Juntunen, 189 Ill.App.3d 224 (1st Dist. 1989).

It also may have been different if the ex-husband had taken steps to remove her as a beneficiary but did not effectuate the change prior to his death. In re Marriage of Velasquez, 295 Ill.App.3d 350 (3d Dist. 1998).

While the best way to protect one’s life insurance proceeds upon death is to remove an ex-spouse as a designated beneficiary, this does not always happen.

Recognizing this, some states have enacted statutes to automatically revoke an ex-spouse’s beneficiary designation in a life insurance policy upon divorce. Illinois has not enacted such a law; consequently, litigation often ensues when an ex-spouse is still the designated beneficiary of a life insurance policy.

To guard against this, clear and specific language that each party waives any beneficial interest in or to any life insurance policy owned by the other should be included as part of a marital settlement agreement. Similar language could also be used in drafting a premarital agreement.

Take heed in drafting, as dissolution and premarital agreements will be construed against the drafter. Richard provides guidance on how to draft a clear and enforceable waiver. While there is no guarantee, one thing is for sure: General boilerplate language is not good enough.

Originally appeared in the November 2010 issue of Chicago Lawyer