Life Insurance Policy Concerns Upon Divorce
National Legal Research Group, Inc.)
Attention: the information on this page pertains to the following case analysis: In re Marriage of Day, 31 Kan. App. 2d 746, 74 P.3d 46 (2003). It is recommended to read this case analysis for a full understanding.
Day’s focus upon the issue of insurability adds an important dimension to the law of classification of term life insurance. The equitable distribution decisions have often viewed such insurance as a series of independent one-year contracts, each for fair market value. If this is true if each year’s contract is truly completely independent of the prior contracts then the failure to divide the policy does not harm the nonowning spouse. If that spouse has an insurable interest, he or she should be able to use postdivorce funds to purchase an insurance policy on the insured’s life for the exact same cost as the present policy.
Upon reflection, after reading Day, the author begins to suspect that the traditional view of term life insurance in the equitable distribution decisions might be more wrong than right. Insurability depends upon age and health, and therefore always declines over time. Even where the insured has not become absolutely insurable, the cost of a one-year independent term life insurance contract will inevitably increase with age. Thus, the right to renew an insurance policy, regardless of age and health, is a right with substantial potential value.
If the premium for future policies is fixed (as the trial court may have believed in Day), the right to renew without a premium increase could have very substantial value. In all likelihood, the fixed premium would be set higher than for a contract with no right of renewal, in order to compensate the insurance company for loss of the right to increase the premium in later years. Valuation of the right to renew will obviously be a complex issue, possibly requiring testimony from an insurance actuary, and it may be that the value of the right in some cases will not justify retaining the actuary. "We suspect that in most cases the cost to the parties of expert witnesses would be greater than the value of the term life insurance policy." In re Estate of Logan, 191 Cal. App. 3d 319, 323, 236 Cal. Rptr. 368, 370 (1987). But cf. In re Marriage of Gonzalez, 168 Cal. App. 3d 1021, 1026, 214 Cal. Rptr. 634, 638 (1985) (suggesting that the cost of a replacement policy is a fair measure of the value of term life insurance). In any event, family law attorneys and judges clearly need to begin thinking about ways to value the right to renew a term life insurance policy.
The situation is even more complex when the right to renew is subject to a schedule of increasing premiums, as was the case in Day. In this situation, everything depends on the schedule. If the schedule is a completely accurate prediction of the actual cost of a one-year term life insurance policy (a hypothetical situation which will of course never arise), the right to renew would have no value; it would be akin to a stock option allowing the purchase of IBM stock for $100 on a stated date, when IBM stock is actually selling for $100 on that date. To the extent that the premium schedule allows renewal for less than the value of a new one-year policy, the right to renew would have value.
Where the holder of a term life insurance policy has the right to purchase future term policies for less than fair market value, it is important that the right to renew be valued and divided. In these cases, the insurance company has almost certainly granted the right to renew only in consideration for higher past premiums. Stated conversely, without an advantageous right to renew, the cost of a term life insurance policy is substantially less. In a very real sense, therefore, when past premiums on a term policy with an advantageous right to renew have been paid with marital funds, marital funds have already been used to pay at least part of the cost of the right to renew. If the right to renew has provable value, that right must be classified and divided.
Indeed, there is already a situation in which the law essentially does this. Assume that two neighbors of the same age and health do identical work, and earn identical gross compensation. One neighbor is self-employed, and, to protect his spouse in the event of his death, he purchases a given amount of term life insurance. The other neighbor works for a large company, and he elects to provide his wife with the same amount of survivor benefits from the company’s retirement plan.
Each of these neighbors has provided his spouse with substantially similar rights to receive value upon his death. Yet the law treats those rights very differently upon divorce. Survivor benefits acquired during the marriage are marital property, and the owner’s spouse is normally entitled to receive their full value upon the owner’s death in essence, the proceeds of the policy. Turner, supra, 6.14. Life insurance policies are marital property only to the extent of their cash surrender value; it is always error to divide the actual proceeds, unless the insured dies during the marriage.
Is this pattern of different treatment unfair? In some situations, probably not. While the spouse of the neighbor with survivor benefits receives greater value, she must also contribute to the cost of the benefits (most commonly with a reduction in her share of the retirement benefits). If the wife whose husband bought life insurance can purchase her own life insurance policy on his life after the divorce, receiving the same benefits and paying the same costs as the wife whose husband elected survivor benefits, the two situations are exactly the same.
The entire difference between the two situations therefore really lies in the existence of the right to renew. Division of present value and division of future proceeds are not really all that different, if (1) the right to the proceeds requires contribution to future premium costs, (2) the future premium costs are equal to the fair value of the benefits acquired, and (3) the spouse who acquired the benefits remains insurable. The first condition is normally true; spouses who obtain survivor benefits must contribute toward their cost. Id. 6.14. Even where direct contribution to the employer is not required, an indirect cost is often imposed when the court sets the percentage of retirement benefits or even marital property generally which is received by each spouse.
The net effect of Day is to require the court to consider the second two factors when term life insurance is divided. This is a step forward in the law. If the nonowning spouse is compensated for any advantageous right to renew, then persons whose spouses purchase life insurance are not greatly disadvantaged against persons whose spouses elect survivor benefits. This is a good result.
Finally, the logical consequence of Day might be to permit the division of term life insurance policies in at least some cases. Assume that a self-employed husband owns term life insurance on his own life, with a right to renew, acquired in lieu of survivor benefits, with the intent of providing for his wife after he dies. Assume further that she receives significant alimony which will terminate upon his death, thereby giving her an insurable interest in his life. Finally, assume he is in ill health, and therefore is uninsurable. The value of the right to renew in this situation would be very substantial, and the husband might well lack sufficient funds to afford to pay the wife her share of it. Even if he has such funds, the wife still needs retirement security, and, since the husband is uninsurable, she literally cannot purchase her own policy on his life. In this situation, the most logical way to divide the right to renew is by dividing the policy itself, directing the wife to pay part of the future premiums, and giving her a share of the proceeds. Failure to reach this result would create a significant and probably unjustifiable distinction between survivor benefits and life insurance.
In most cases, however, the owning spouse will not be uninsurable. So long as the nonowning spouse is compensated for the fair value of the right to renew any term life insurance policy acquired by marital funds, the rule against division of future insurance proceeds should not inflict harm upon nonowning spouses.
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