Does a life insurance beneficiary change by divorce?

How would you feel if your evil ex-husband or witch of an ex-wife received your life insurance after you die?  Talk about rolling over in your grave!?

Upon filing for divorce, in California, there are automatic restraining orders. Among them, you are not allowed to make changes to non-probate transfers without the consent of your soon to be ex-spouse. This means you can make a new will (since that’s a probate transfer) but you can not change your trust, IRA, 401k or life insurance beneficiary.

Yes, some people die during extended divorce proceedings and their not quite ex-spouse gets the asset. This is not the outcome many want but it’s often unavoidable. However, after the divorce is complete it is avoidable but you might have to take action!

Some beneficiary designations are automatically revoked, if they pay to the ex, by divorce.  Some are covered by federal ERISA law which is beyond the scope of this post and the rest are covered by California state law.  Many of these are governed by California probate code 5600 which provides as follows for nonprobate transfers after divorce (with my added emphasis):

5600. (a) Except as provided in subdivision (b), a nonprobate transfer to the transferor’s former spouse, in an instrument executed by the transferor before or during the marriage, fails if, at the time of the transferor’s death, the former spouse is not the transferor’s surviving spouse as defined in Section 78, as a result of the dissolution or annulment of the marriage. A judgment of legal separation that does not terminate the status of husband and wife is not a dissolution for purposes of this section.
(b) Subdivision (a) does not cause a nonprobate transfer to fail in any of the following cases:
(1) The nonprobate transfer is not subject to revocation by the transferor at the time of the transferor’s death.
(2) There is clear and convincing evidence that the transferor intended to preserve the nonprobate transfer to the former spouse.
(3) A court order that the nonprobate transfer be maintained on behalf of the former spouse is in effect at the time of the transferor’s death.
(c) Where a nonprobate transfer fails by operation of this section, the instrument making the nonprobate transfer shall be treated as it would if the former spouse failed to survive the transferor.
(d) Nothing in this section affects the rights of a subsequent purchaser or encumbrancer for value in good faith who relies on the apparent failure of a nonprobate transfer under this section or who lacks knowledge of the failure of a nonprobate transfer under this section.
(e) As used in this section, “nonprobate transfer” means a provision, other than a provision of a life insurance policy, of either of the following types:
(1) A provision of a type described in Section 5000.
(2) A provision in an instrument that operates on death, other than a will, conferring a power of appointment or naming a trustee.

At first blush PC 5600 seems pretty clear, right? It says nonprobate transfers, executed during marriage, are invalid after divorce. What could be more plain, right?  I mean I know life insurance is a nonprobate transfer so it’s covered I think….  However, then you get all the way down to subpart (e) and that’s a game changer for life insurance because it says, and I do paraphrase, “oh ya, never mind what we said above because this section does NOT apply to life insurance.”

So… hey, I am not done yet! I know a few of you are now contacting your life insurance agent just to make sure and that’s probably the right thing to do but let me finish!

Seriously though, take this as an opportunity to check ALL your payable on death beneficiary designations. Life insurance, annuities, 401ks, IRAs, last pay checks, bank accounts and any other assets that allow for a POA or payable on death. Many are changed, automatically, by divorce by many are not. Plus, even the ones that are automatically revoked could create a fight after death. Thus better to get it straight now while you are alive!

– John Palley

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