Update your information: Life insurance payout could go to ex-spouse

It?s a familiar scene. Parties get a divorce but fail to change the beneficiary designation in their life insurance policies. When one of them dies, does their ex-spouse receive the life insurance proceeds even though the decedent would probably prefer that the proceeds go to someone else? Perhaps they?d want it to go to their new spouse or children?

This question has perplexed attorneys and judges in domestic relations, chancery and federal courts. Finally, there is an answer.

In 2018, the Illinois legislature amended the Marriage and Dissolution of Marriage Act to provide that a dissolution judgment operates to revoke an ex-spouse’s status as a beneficiary under a previously issued life insurance policy. See 750 ILCS 5/503(b-5) (eff. Jan. 1, 2019). Until this change the Act did not automatically revoke the designation of a spouse as a beneficiary of a life insurance policy when the divorce judgment was silent as to the life insurance policy. This meant the ex-spouse would take the policy if the beneficiary designation was not changed prior to death.

The 2018 amendment to section 503(b-5) of the Act came as a welcome change to many. However, because the legislature was not clear in its intent to make section 503(b-5) either retroactive or prospective, litigation still ensued where the dissolution judgment was entered before its enactment. This often came in a declaratory judgment or interpleader action designed to have the court decide who was entitled to the proceeds.

In a case of first impression, the First District Appellate Court answered the question, holding section 503(b-5) of the Act does not apply retroactively to cases where the dissolution judgment is entered prior to Jan. 1, 2019, the effective date of the statute. See Shaw v. U.S. Financial Life Ins. Co., 2022 IL App (1st) 211533. The court, therefore, affirmed Cook County Circuit Court Judge Anna M. Loftus’s grant of summary judgment in favor of the decedent’s ex-wife and the disbursement of the life insurance proceeds to her.

In Shaw, the issue on appeal was whether section 503(b-5) of the Act revoked the ex-wife’s status as the beneficiary of her deceased ex-husband’s life insurance policy of which she was still named a beneficiary.

The Shaw opinion begins with an in-depth look at subsection (b-5)(2) of the statute, which provides in pertinent part: ?(2) If a judgment of dissolution of marriage is entered after an insured has designated the insured’s spouse as a beneficiary under a life insurance policy in force at the time of entry, the designation of the insured’s former spouse as beneficiary is not effective unless: (A) the judgment designates the insured’s former spouse as the beneficiary; (B) the insured redesignates the former spouse as the beneficiary after entry of the judgment; or (C) the former spouse is designated to receive the proceeds in trust for, on behalf of, or for the benefit of a child or a dependent of either former spouse.? 750 ILCS 5/503(b-5)(2). If a designation is not effective under subsection (b-5)(2), the proceeds are payable to the named alternative beneficiary or the insured’s estate. 750 ILCS 5/503(b-5)(3).

In determining whether the statute applies retroactively or prospectively, the court in Shaw considered whether the operative act triggering application of section 503(b-5) is the date of the dissolution judgment or the date of the ex-spouse’s death. The statute itself does not provide clear guidance, but the court held the operative act is the date of entry of the dissolution judgment.

The court held this way based on a reasonable interpretation of the statute, rules of statutory construction, an examination of case law from Illinois and foreign jurisdictions involving analogous statutes in other contexts, and limited legislative comments by Senator Chuck Weaver and Representative Steven Andersson, who both discussed the intent of the statute to provide for what happens if a spouse fails or forgets to correct the beneficiary of a life insurance policy after a divorce. See 100th Ill. Gen. Assem., Senate Proceedings, Apr. 11, 2018, at 39 (statements of Weaver); 100th Ill. Gen. Assem., House Proceedings, May 21, 2018, at 37 (statements of Andersson).

Based on all of this, Shaw ruled.the most reasonable reading of the statute is that the operative act which triggers its application is the entry of the dissolution.? Thus, the statute does not apply to cases where the divorce occurs prior to the statute’s effective date of Jan. 1, 2019.

Despite the clear pronouncement in Shaw, divorce practitioners are wise to remind clients to either change or redesignate their life insurance policy beneficiaries upon divorce to reflect their true intent and prevent future litigation beyond the grave.

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