Life Insurance Policies and Proceeds

Community property consists of the property, other than separate property, acquired by either spouse during marriage[i].

Acquisition of a life insurance policy using community funds does affect the division of that policy in case of divorce[ii]. Generally,a life insurance policy obtained with community funds is an asset of the community[iii].  In re Estate of Leuthold, 52 Wn.2d 299 (Wash. 1958), the court held that insurance or the proceeds of insurance are not mere expectancies or choses in action, but are property and if the premiums are paid by the assets of the community, they constitute community property.  Thus, spouses ordinarily have a community interest in the proceeds of an insurance policy to the extent it was acquired with community funds[iv].

Also, the surrender value of a life insurance policy may be considered community property[v].  In In re Estate of Knight, 31 Wn.2d 813 (Wash. 1948), the court held that cash surrender value of a life insurance policy is not  property.  However, in in re Estate of Leuthold, 52 Wn.2d 299 (Wash. 1958), the court overruled the decision and held that the cash surrender value of a life insurance policy is property.

Property that family law code provisions contemplate relating to the characterization of marital property includes not only life insurance policies, but also the effects of life insurance policies[vi].  Thus, in a divorce action, the cash surrender values on life insurance policies may be considered community property which the court may award to one or the other of the spouses[vii].  Once the community ceases to pay the premiums and the premium for a new term is paid with post-separation separate property earnings, the policy is characterized as separate property[viii].

However some jurisdictions follow a different approach.  In Volunteer State Life Ins. Co. v. Hardin, 145 Tex. 245 (Tex. 1946), the court held that the proceeds of a policy belong to the person named as payee, and it becomes property upon the contingency of the death of the insured in the lifetime of the payee.  Therefore, as proceeds of a policy could not become the property of the husband or the wife during the lifetime of both of them, it cannot be held to be community property, and is therefore the separate property of the one to whom it is made payable.

A policy of insurance is not what is called a negotiable instrument, but it is assignable and transferable[ix].  If an insurance policy taken out by a husband for the benefit of his wife, is a valid gratuity in her favor, as to make her right under the policy at his death her absolute and separate estate, the interest becomes her separate property not disposable by the husband[x].  Such a policy belongs to the wife exclusively, and not to the community of acquets and gains.

A policy of insurance, issued at the instance of the husband, upon his own life, in favor of his wife, inures to her separate benefit from the date of its issuance, and the interest so acquired by the wife is not then or thereafter affected by the fact that the premiums are paid by the husband from the funds of the community[xi].

The fundamental principles of community property law dictate that each spouse should upon his/her death have the right to dispose of his/her one-half interest in the policy as community property[xii].  Thus, a spouse is entitled to one-half of the proceeds from life insurance purchased with community funds[xiii].

A life insurance policy, the premiums on which are paid out of community funds, constitutes community property, and a husband may not, without the consent of his wife, make a change therein, even though the policy contains a provision that he may make a change[xiv].

Any community interest in an insured’s right to change beneficiaries is limited to avoiding gifts of community personal property[xv].  The surviving spouse is entitled to set aside his/her community share in life insurance proceeds even if the decedent spouse designated another person as beneficiary[xvi].  This rule applies to term life insurance policies as well as whole life policies.  If the insurance policy provides whole life coverage, then the policy is properly characterized as a community asset to the extent that it was funded by the community[xvii].

Life insurance proceeds are subject to the general rule that a spouse cannot dispose of community personal property without either the other spouse’s written consent or consideration[xviii].  Further, spouse’s community interest in the proceeds of a policy obtained with community funds may not be defeated by a gift of the policy proceeds to a third party named as beneficiary without the spouse’s consent[xix].  After the insured’s death the surviving spouse can bring an action to set aside any unauthorized gift of insurance proceeds to the extent of his/her community interest, if this right has not been waived or released[xx].

When one spouse is the named beneficiary in the life insurance policy of the other spouse, and remains so at the time of the insured’s death, all proceeds vest at that moment in the surviving spouse as separate property even though all the premiums had been paid with community funds[xxi].

In re Estate of Towey, 22 Wn.2d 212 (Wash. 1945), the court held that where a policy of insurance is taken out by a husband during coverture and made payable to his estate or to his executor or administrator and the premiums are paid with community funds, the proceeds of the policy become community property upon his death.  The court further held that where the insured designates his wife beneficiary of a policy of life insurance issued during the existence of the community, even if the premiums on the policy are paid with funds of the community, the proceeds of the policy become, upon the death of the insured, the separate estate of the wife.  Also, where policies, premiums of which are paid with community funds, payable to the wife insuring the husband’s life expressly reserve to the insured husband the right to change the beneficiary, the husband has the right to change the beneficiary, but that right is limited to changing the beneficiary to the estate or personal representatives of the insured.

The community or separate character of a term life insurance policy may depend on the character of the funds used to pay the most recent premium[xxii].  Paying insurance premiums with community funds renders the policy community property and, in the absence of some other beneficiary designation, the proceeds also belong to the community[xxiii].

However, where a contract for insurance was lawfully made by the husband as the manager of the community estate, the community estate was not entitled to be reimbursed for the community funds lawfully used in paying the premiums on the policies[xxiv].

i] Camp v. Camp, 972 S.W.2d 906 (Tex. App. Corpus Christi 1998)

[ii] In re Marriage of O’Connell, 8 Cal. App. 4th 565 (Cal. App. 6th Dist. 1992)

[iii] Emard v. Hughes Aircraft Co., 153 F.3d 949 (9th Cir. Cal. 1998)

[iv] In re Marriage of O’Connell, 8 Cal. App. 4th 565 (Cal. App. 6th Dist. 1992)

[v] Cox v. Cox, 304 S.W.2d 175 (Tex. Civ. App. Texarkana 1957)

[vi] Camp v. Camp, 972 S.W.2d 906 (Tex. App. Corpus Christi 1998)

[vii] In re Estate of Leuthold, 52 Wn.2d 299 (Wash. 1958)

[viii] Minnesota Mut. Life Ins. Co. v. Ensley, 174 F.3d 977 (9th Cir. Cal. 1999)

[ix] Pilcher v. New York Life Ins. Co., 33 La. Ann. 322 (La. 1881)

[x] Id.

[xi] Succession of Desforges, 135 La. 49 (La. 1914)

[xii] Francis v. Francis, 89 Wn.2d 511 (Wash. 1978)

[xiii] Ennis v. United of Omaha Life Ins. Co., 825 F. Supp. 962 (D. Kan. 1993)

[xiv] King v. Prudential Ins. Co., 13 Wn.2d 414 (Wash. 1942)

[xv] In re Marriage of O’Connell, 8 Cal. App. 4th 565 (Cal. App. 6th Dist. 1992)

[xvi] Emard v. Hughes Aircraft Co., 153 F.3d 949 (9th Cir. Cal. 1998)

[xvii] Minnesota Mut. Life Ins. Co. v. Ensley, 174 F.3d 977 (9th Cir. Cal. 1999)

[xviii] In re Marriage of O’Connell, 8 Cal. App. 4th 565 (Cal. App. 6th Dist. 1992)

[xix] Emard v. Hughes Aircraft Co., 153 F.3d 949 (9th Cir. Cal. 1998)

[xx] In re Marriage of O’Connell, 8 Cal. App. 4th 565 (Cal. App. 6th Dist. 1992)

[xxi] Peters v. Peters, 92 Nev. 687 (Nev. 1976)

[xxii] Bevan v. Bellingham (In re Estate of Bellingham), 85 Wn. App. 450 (Wash. Ct. App. 1997)

[xxiii] id

[xxiv] Volunteer State Life Ins. Co. v. Hardin, 145 Tex. 245 (Tex. 1946)


Inside Life Insurance Policies and Proceeds