Life Insurance, Beneficiaries, and Divorce
What happens if you don’t remove your ex spouse from your life insurance policy following divorce? You may be surprised to learn that how you got the life insurance policy makes an enormous difference.
Pennsylvania estate law provides that divorce automatically nullifies the designation of an ex spouse as the beneficiary of a life insurance policy. Only if the parties’ settlement agreement or a court order clearly provides that the ex spouse shall continue as the beneficiary can an ex spouse remain entitled to a life insurance benefits designation signed before the divorce. Thus, when a divorce is finalized without any agreement or court order that directs existing life insurance to an ex spouse, Pennsylvania estate law mandates that each ex spouse forfeits all claims to collect existing life insurance left by the other spouse.
In a recent case, a collision of this Pennsylvania estate law and federal law regulating employment benefits produced a surprising result. In the case, a man had named his wife as the primary beneficiary of a $40,000 life insurance policy provided to him by his employer. He named his nephew as the contingent beneficiary—the person who would be paid the $40,000 if the wife were deceased or otherwise legally barred from receiving the money.
The man and his wife/beneficiary divorced and the man died three months after the issuance of the final decree of divorce. Despite the divorce, the man had not removed his ex wife as the primary beneficiary on the life insurance policy.
Following his death, the man’s estate executor petitioned the court to permit the estate to pay the life insurance to the nephew, noting that upon the divorce the designation of the ex wife was null. But the ex wife disputed the application of Pennsylvania estate law, because employee benefit plans are strictly regulated by federal law only. Federal law requires that benefit payments be made based on the plan documents, in this case the original beneficiary designation form that still named the ex wife as the primary beneficiary.
The dispute was litigated all the way to the Pennsylvania Supreme Court, and the ex wife won. The Supreme Court reviewed the federal law and concluded that Congress passed the federal Employee Retirement Income Security Act (ERISA) in 1974 to establish a national, uniform body of law relating to employee retirement and benefit plans. The court ruled that ERISA law clearly requires that each employee’s insurance plan documents control the identity of the employee’s beneficiaries.
Noting that an employer may operate in multiple states and that an employee may live in one state and the employee’s ex spouse and other beneficiaries may live in yet several other states, the Pennsylvania Supreme Court recognized that one divorced employee’s benefits could be affected by the divorce and estate laws of multiple states. Acknowledging the importance of ERISA’s prevailing over potentially conflicting state laws on the administration of employee benefit plans in divorce cases, the court found ERISA law controlling.
The court also noted that a key purpose stated in ERISA is that the administration of all employee benefit plans must be uniform as to all employees in the plan; with national employers operating in multiple states, the administration of benefits simply would not be uniform for all employees if various state divorce laws were applied to one plan.
Ruling that ERISA has a “vast reach,” the Pennsylvania Supreme Court held that the ex wife was entitled to the $40,000 payment. The court’s decision would have been completely different if the insurance policy had been a private policy, purchased by the deceased man from an insurance company or agent. Private insurance policies are not subject to any ERISA regulation.
Had the deceased man’s life insurance been payable on a private policy unrelated to his employment benefits, Pennsylvania law automatically nullifying the ex wife’s beneficiary status upon divorce would have been controlling and the policy payment would have gone to the man’s nephew.
If you have any employment benefits, whether pension, retirement savings, or life insurance, all death benefits on the plans will be paid according to the last beneficiary designation you provided to your employer before your death. If you are divorced or divorcing, review your plan documents, and make any appropriate changes that are supported by your settlement agreement or court orders.
If you plan to leave private life insurance to your ex spouse, it is best to reissue a new beneficiary designation after the issuance of the divorce decree to be sure that your intentions are clear and are followed by your private insurance provider.