What Happens When a Life Insurance Policy Designates an Ex-Spouse as the Beneficiary.

• Author: Gabay, Sari
• Position: [LEGAL UPDATE]

* While married couples may create Last Will & Testaments and forget to change them following a divorce, numerous states have "revocation on divorce" statutes that typically treat a divorce as voiding a testamentary bequest to a former spouse. These revocation on divorce statutes were initially aimed at Last Wills & Testaments and rest on an assumption that the deceased presumably would not wish for an ex-spouse to inherit his or her assets and personal effects. Thus, if no action to change a Will is taken post-divorce, an ex-spouse generally will not inherit under the Will by operation of statute, at least in those states with such laws. But what if an ex-spouse is the designated beneficiary under a life insurance policy? Should a life insurance policy be treated the same as a Will with benefits automatically revoked on divorce?

At least 26 states, including New York, have adopted "revocation-on-divorce" laws so that beneficiary designations to former spouses are revoked upon divorce. Before considering New York law, it is relevant to understand a recent United States Supreme Court decision, Sveen v. Melin, 138 S.Ct. 1815 (2018), which involved an ex-wife's claim under Minnesota law to the death benefits under her ex-husband's life insurance policy.

Although Minnesota has a revocation on divorce law that provides that "the dissolution or annulment of a marriage revokes any revocable beneficiary designation made by an individual to the individual's former spouse," Minn. Stat.. 524.2804 subd. 1 (2016), the ex-wife in Sveen argued that the Minnesota law violated the Contracts Clause of the U.S. Constitution because the life insurance policy was purchased before the law was enacted. The Contracts Clause bars states from passing laws "impairing the obligation of contracts." The lower court ruled in favor of the children but the Court of Appeals for the Eighth Circuit reversed and found in favor of the ex-spouse.

On appeal to the U.S. Supreme Court, the question presented was whether Minnesota's revocation law could apply to a beneficiary designation that pre-existed the enactment of the statute, without violating the Contracts Clause of the Constitution. The Court reasoned that the law is designed to reflect a policyholder's intent and it supplies a default rule that a policyholder can override. Specifically, the Court stated: "[t]he intent of most individuals after a divorce would be to disinherit their ex-spouse." As such, "the insured's...