§ 7.08 Characterizing Life Insurance

JurisdictionUnited States
Publication year2021

§ 7.08 Characterizing Life Insurance

[1]—Term Insurance and Whole Life

Two different types of life insurance are common in America today. One is term insurance, the other is whole life. Term insurance is a simple contract to pay a certain specified benefit if the insured dies within a specified period. If the insured does not die, the policy lapses and has no cash value at the end of the term. On the other hand, whole is both life insurance and a savings vehicle. There is a death benefit provided, but the policy also has investment value. Even if the insured does not die during the specified term, the policy has a cash value at the expiration of the term, and this cash value is refunded if the policy is cancelled.

[2]—Characterizing Life Insurance on the Life of One of the Spouses at Divorce

[a]—Determining When the Policy Was Acquired

Spouses sometimes at divorce own a life insurance policy covering the life of one of the spouses. In order to classify a life insurance policy under one of the approaches used for property acquired over time, it must be determined when the "policy" was acquired (as well as the type of consideration given). For example, under the inception of title approach312 the policy would be characterized based upon the first consideration given when the decedent "acquired" when the decedent "acquired" the policy.

Determining the time of acquisition is not always easy. If the policy benefits have been changed each year, does that mean that there was a new "acquisition" every year?313 What if insurance is purchased from a different carrier? Some states have concluded that each premium payment "acquires" a new policy.314 This view has been referred to as the "risk payment" approach to classifying term life insurance policies.315 Other courts have concluded that the time of acquisition is the time the first premium is paid, regardless of how many times the policy is renewed.316

[b]—Characterizing the Policy

[i]—In General

Once the time of acquisition is determined, the life insurance policy can easily be characterized pursuant to one of the approaches used for the acquisition of property over time.317 For example, under the inception of title approach,318 the policy is characterized based upon the first consideration given to purchase the policy.319 If the policy was acquired before marriage, it is separate property. However, the marital estate may have a reimbursement claim for premiums paid after marriage.320 Under the pro rata approach,321 the policy would be characterized based upon the character of the funds used to pay all premiums.322

Of course, the marital estate can only have a claim if marital consideration is provided to purchase the policy, which normally occurs via the utilization of marital funds for premiums.323 So, for example, if a parent purchases a life insurance policy covering the life of the spouse, and the parent is listed as the owner of the policy, the marital estate would have no claim.324

[ii]—Term Insurance

In divorce proceedings, term policies are not the subject of substantial dispute for property division purposes, since most courts agree that the value is minimal (where the spouse has not yet died).325 Courts have been inclined to treat term insurance as valueless326 or, for some other reason, not susceptible to division.327 Parties are more concerned about whole life policies.

Certain issues have arisen pertaining to term policies. The argument has been advanced that term policies have some value, even though there is no cash value.328 This approach focuses upon the replacement value of term policies. At the time of divorce, premiums for the existing policy could be lower than the premiums would have been for a new policy purchased at that time, because the existing policy might have been initially purchased when the insured was younger and in better health. Another court noted that an existing term policy could have substantial value at divorce if the insured has become uninsurable since the date the policy was purchased.329 Another factor that complicates this issue is that life insurance benefits are frequently fully paid by an employer pursuant to a group life insurance plan. Many such plans do not even require evidence of insurability to obtain coverage. In addition, the group plan premium could be much lower than the premium the employee spouse would have to pay for an individual policy.

Regardless of the replacement value, if any, of the term insurance, the policy has a value, at least for the remainder of the term. As a result, the right to receive a share of the proceeds under the term policy until the next premium is due could be divided.

It is unclear whether this issue was presented in a Kentucky case in which the husband's employer provided term life insurance as a fringe benefit of employment.330 The husband initiated a bifurcated divorce proceeding. One month after the divorce decree was entered, but before the financial terms had been adjudicated, the husband died. The husband had designated a thirty-party beneficiary of the policy. The court concluded that the right to designate a beneficiary was "not property," apparently believing that the right to receive the proceeds was property, but because it was acquired after divorce, could not be divided by a divorce court.

A reimbursement issue also conceivably could arise relating to term policies in those states that apply the inception of right approach. The insured frequently has purchased a term policy before the marriage and has continued it during the marriage, paying the premiums with marital property. This technically constitutes a use of marital property for the benefit of separate property, thereby potentially creating a reimbursement right.331 Reimbursement would be unfair, however, if the beneficiary during the marriage was the other spouse or a child of the marriage. If this was the case, the comfort that resulted from such a beneficiary designation should constitute an offsetting benefit that would nullify any reimbursement claim.332 If the beneficiary was someone other than the spouse or the child, however, reimbursement may be appropriate, unless the spouse of the insured somehow consented to this use of marital funds.

Some have argued that a term life insurance policy is merely a right to receive a payment of a certain amount if the decedent died during the policy period. As such, its character should be determined by the character of the last premium payment. This approach was generally accepted in a California case. In this case, a term policy was purchased during marriage. The policy was not specifically divided in the divorce decree. After divorce, the husband continued to make payments with separate property and changed the beneficiary to his new wife...

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