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Life insurance beneficiaries and divorce

For those getting a divorce, a beneficiary designation on a life insurance policy is not usually top of mind. And for that reason, states including Colorado, have passed laws that an ex-spouse beneficiary does not receive life insurance proceeds after a divorce unless there was an affirmative designation after the divorce.

A Minnesota state law passed in 2002 specified that after a divorce the designation of a former spouse is automatically revoked on a life insurance policy. The U.S. Supreme Court weighed in on the constitutionality of the state law this term and upheld the state law.

The facts of the case

The scenario was somewhat familiar. The father of two children remarried in 1997 and was married for 10 years. After the divorce, he never updated the primary beneficiary designation on his life insurance policy.

When he died, his two adult children claimed that they were the ones who should receive the proceeds under the 2002 Minnesota law.

A federal appeals court ruled in favor of his listed ex-spouse. The court found that applying the 2002 state law to a pre-existing life insurance policy violated the contracts clause.

An 8-1 decision

The Supreme Court disagreed stressing that while the contracts clause limits state power to pass laws, the restriction is not absolute. To determine what “crosses a constitutional line” Justice Elena Kagan looked at whether the state law substantially impaired the relationship created in the contract.

The intent for passing the state law what policyholder intent. It took into account that many people overlook changing beneficiary designations on life insurance after divorce. And few want an ex-spouse to inherit their life insurance.

Justice Neil Gorsuch was the only one to dissent. His view was that no substantial impairment exception exists and any law that impairs a contract violates the clause. He concluded the Minnesota law violated the constitution because choice of life-insurance beneficiary is “the whole point” to have a policy in the first place.

Beneficiary designations transfer funds outside of a will, so they must be examined any time you have a major life change. And when considering or while a divorce is pending it is often crucial to discuss the effect on an estate plan.

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