By Laura W. Morgan, J.D.

When a husband and wife divorce, and one or both parties have a life insurance policy, the general rule is that divorce does not, per se, affect or defeat a spouse’s rights as a designated beneficiary in a policy on the other spouse’s life, absent a change in beneficiary designation, a provision in the contract of insurance itself which makes the beneficiary ineligible if the status of spouse does not exist at the time of death, or a specific statute revoking beneficiary status on divorce. This rule, however, is not universal. Some states have divestiture statutes whereby the status of a spouse as named beneficiary is terminated by the entry of the divorce decree, without regard to the fact that the spouse remains the named beneficiary.

A court can, however, order one spouse to maintain a life insurance policy naming the other spouse or a child as beneficiary. The power, however, cannot be exercised willy-nilly. Instead, the court’s order that one spouse maintain life insurance for the benefit of the other spouse must be predicated on both an alimony award to the former spouse, the ill health of the payor spouse, and the ability of the payor spouse to obtain life insurance.

Quite often, spouses fail to comply with court orders or agreements concerning the maintenance of life insurance. The failure can take a number of forms: (1) cancelling the life insurance in existence at the time of divorce and substituting another policy; (2) changing beneficiaries on an existing policy. When the policies in existence at the time of death differ from those in existence at the time of the decree, provided nothing in the decree or support agreement provides to the contrary, most courts have concluded that the spouse or child who was designated the beneficiary in the decree or agreement is entitled to recover the proceeds in a replacement policy. Usually, a former spouse learns of the insured’s failure to comply with a court order or agreement to maintain life insurance only after the insured’s death. If knowledge of a violation is acquired prior to death, the former spouse may seek compliance by use of the court’s contempt powers. Once the insured has died, however, the usual remedy available to the former spouse or children is to seek to impose a constructive trust on the proceeds. The extent of the interest on which a trust may be imposed will depend on the extent of the obligation of the insured spouse.

When knowledge of the insured’s failure to comply comes after death, the usual remedy requested is the imposition of a constructive trust. Complications may arise in imposing a constructive trust depending on the party holding the proceeds at the time of the equitable action. When the proceeds are still in the hands of the insurer, an interpleader action may be filed in which both claimants assert their various claims to the proceeds. More troubling is when the proceeds have already been tendered to the designated beneficiary and the former spouse or child of the insured attempts to recoup the funds.

This is where second wives and new children can be hurt. A constructive trust can be placed on proceeds of an insurance policy that name them as beneficiaries, because the husband violated a court order to maintain a life insurance policy for the first wife and / or previous children. Thus, in stepfamilies, it is of utmost importance to check whether a court order or marital separation agreement provides for beneficiary status on a life insurance policy.

Even when there is no court order or agreement, the issue of life insurance is still important. As noted in the first paragraph, divorce mayor may not act to revoke the beneficiary status of a prior spouse. It is therefore important to make sure in a new marriage that the beneficiary of a life insurance policy be changed to the current spouse to reflect the new marriage.