Life Insurance Proceeds: Marital Asset?

July 17, 2009 | Blog, Divorce, Marital Property

Icon for author Brian Vertz Brian Vertz

Here is an interesting issue, not yet resolved by the Pennsylvania courts: whether the proceeds of a life insurance death benefit may be counted as a marital asset. Here’s the story:

Let’s say that husband and wife are separated, and one of them dies. If the grounds for divorce existed prior to the death (i.e., both spouses filed their affidavits of consent, or they were separated two years prior to the death), the divorce action does not abate. The deceased spouse’s estate becomes a party to the divorce action, which must go on to its conclusion. If the deceased spouse was insured under a life insurance policy (let’s say a whole life or universal policy, which has cash value), then someone is going to receive a death benefit.

Perhaps the surviving spouse was named as the death beneficiary before the spouses were separated. The divorce court might have even entered an order compelling the now-deceased spouse to name the surviving spouse as the beneficiary under the life insurance policy. (We will discuss the other possibility – that the deceased spouse named someone other than the surviving spouse as beneficiary – another time.) 

The death benefit of a life insurance policy is usually greater than its cash value. (For a whole life or universal life policy, the cash value is equal to the excess premiums that were paid over the cost of term insurance; the excess premiums accumulate, and the insurance company invests them for the benefit of the policy owner.)  In a divorce case where whole or universal life insurance is a marital asset, the asset value is generally equal to the cash value less any policy loans. But now that a spouse is dead, there is no cash value. There is only the proceeds of the life insurance death benefit, which likely exceed the cash value. Is the death benefit a marital asset?

It might depend on what our law means by the word “acquired.” You see, property acquired prior to separation is marital property unless it falls into one of the statutory exclusions. The policy itself was acquired during the marriage, but the death benefit was not acquired until after separation (which would make it separate property). In the case of a personal injury settlement or verdict, our law says that the property is “acquired” when the settlement agreement is signed or the judge enters the verdict, even if the injury occurred prior to separation. The post-separation settlement or verdict does not “relate back” to the pre-separation injury under our law, so it is not marital property.

But there is a problem. If we treat life insurance proceeds like personal injury settlements, then a marital asset (the cash value) has disappeared and there is no marital asset to replace it.

Property which is received in exchange for marital property is, generally, marital property. For instance, if a divorcing couple owns a bank account, and after separation, someone withdraws money to buy a TV, the TV is marital property. So a life insurance policy could be viewed as a lottery ticket that was purchased prior to separation, and its proceeds would be deemed to be property received in exchange for marital property, which is still marital property.

What if the deceased spouse named someone other than the surviving spouse as a beneficiary? The analysis becomes even more troublesome, because now we have to balance the interests of the surviving spouse against the interests of a third party. If we decide that the life insurance proceeds are entirely non-marital, then the marital estate may be diminished. But if we decide the proceeds are marital, a third party’s property rights are impaired. As I mentioned, the courts have not yet resolved this matter.

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