Divorce and Life Insurance
BY: Michael A. Robbins
1. EGELHOFF v EGELHOFF, 532 U.S. 141 (2001)
The United States Supreme Court ruled that the Federal ERISA of 1974 pre-empts a state statute that severs by operation of law a former spouse’s interest in life insurance and retirement benefits. Therefore, if an employee who is a qualified plan participant is ordered pursuant to a Judgment of Divorce to provide life insurance to a former spouse, but the employee does not designate the former spouse in the plan documents, the proceeds of life insurance will be distributed according to plan documents. In other words, the federal plan pre-empts the state statute and any state
issued Judgment of Divorce.
2. IN THE ESTATE OF CHERYL A. ROWLEY A/K/A CHERYL A. MAC INNES vs. JOE DEE MAC INNES, Michigan Court of Appeals No. 241649 (Decided on January 8, 2004 and updated on March 26, 2004)
On January 8, 2004, the Michigan Court of Appeals distinguished the Egelhoff Supreme Court case, and in a published opinion indicated that the language in a Judgment of Divorce that waives a spouse’s interest in a former spouse’s life insurance policy, even if through an ERISA plan, is sufficient to release any interest, even if the former spouse failed to make the beneficiary change. The Court distinguished the Egelhoff case by stating that in the Rowley case, the parties had expressly “waived” any right to the insurance proceeds in the Judgment of Divorce. The Court of Appeals reasoned that principles of “waiver” were more appropriate to resolve the case than principles of “pre-emption.”
In light of the Egelhoff and Rowley cases, it appears that two conflicting options are available:
A. If the beneficiary designation is not changed in accordance with the terms of the Judgment of Divorce, one is pre-empted from changing the beneficiary after death (Egelhoff v Egelhoff); or
B. If one fails to change the beneficiary designation in a Judgment of Divorce, the designated beneficiary still won’t be able to collect life insurance policy based upon the “waiver” in the Judgment of Divorce. (In Estate of Rowley vs. Mac Innes)
3. Goucher v Goucher , Court of Appeals No. 239219, Decided September 4,
2003 (unpublished)
In this case, the husband in a Judgment of Divorce agreed to name his ex-wife as beneficiary on the life insurance policy to secure the payment of spousal support. However, after the entry of the Judgment of Divorce, he borrowed $3,400 from the cash value of the policy, and then let the policy lapse for non-payment. He then died. The ex-wife then brought an action against the current wife to collect the value of the life insurance policy under a “Constructive Trust” theory. The Court of Appeals denied the claim.
4. Hot Tips
A. Write a letter to your client, or include in the Judgment of Divorce, that it is the client’s obligation to make sure that the life insurance policy has the proper designation; prevents the owner from changing the secured amount or from withdrawing any cash surrender value; and provides notice to the secured party if the premiums are not made or the owner attempts to make any changes.
B. Include in the Judgment of Divorce that the beneficiary designation is irrevocable for the appropriate period of time, and that the secured party has a right at all times to confirm the secured amount; payment of premiums; the status of all loans and the cash surrender value of the policy.
C. Write a letter to your client, or include in the Judgment of Divorce, that the insurance company must send duplicate notice of premiums to both the owner and the secured party, and provide the secured party an opportunity to make the premium payments in order to avoid a policy from lapsing, together with an opportunity to seek reimbursement for the amounts paid.