Securing the Beneficiary You Want

How sad it is when the wrong beneficiary is able to receive the proceeds of one’s life insurance? This is an all too common problem encountered when changes in one’s life due to divorce or death are not followed through with changing the beneficiary of one’s life insurance policy.

In the Case of State Farm vs. Goecks, policy proceeds were paid out to Gary’s ex first wife. In this case, Gary Goecks was insured through several life insurance policies naming Gary’s current wife, Donna as beneficiary for most of the policies.

Gary’s son claimed that he was entitled to all of the policy death benefits due to a provision in the divorce decree in connection with Gary’s divorce from his first wife Jeffrey’s mother, Sharon. To add fuel to the fire, the divorce decree required Gary to maintain life insurance for the benefit of his child, Jeffrey and Christopher. However, Christopher has pre-deceased Gary so only Jeffrey was the remaining child.

The divorce decree was unfortunately was not clear as to when or if ever the insured could change the beneficiaries or for that matter the divorce paperwork was silent regarding the effect of the death of one of the adult children prior to the death of Gary.

Gary and Sharon were divorced October 15, 1990. At that time, Gary had two Prudential policies and two State Farms policies as well as a separate MetLife Group Term policy.

The divorce judgement stated the Respondent “Gary” shall be required to maintain the petitioner “Sharon” as the primary, irrevocable beneficiary on one-third of the face value of all his life insurance policies in effect as of the date of the final hearing or in the amount of $75,000 of the face value of said policies, whichever sum is greater. Respondent shall provide the petitioner proof of said insurance and beneficiary designations. Petitioner shall pay the Respondent the sum of $25 per month toward the cost of said insurance. The parties further agree to designate the children as primary beneficiaries of all life insurance policies except and set forth above.

The judgement specifically identified the Prudential and State Farm policies but did not mention the MetLife Group policy.

At or around the time of the divorce, Gary designated the two adult children as the primary beneficiaries under the Prudential and one of the State Farm policies, leaving Sharon as the beneficiary of the other State Farm policy.

After Christopher’s death in 2003, Gary remarried Donna in 2004. Gary further removed Jeffrey and Christopher as beneficiaries of both Prudential policies naming Donna as the primary beneficiary as well as designating Donna and Jeffery as co-beneficiaries on one of the State Farm policies with his ex-wife Sharon remaining the sole beneficiary of the other State Farm policy. With regard to the MetLife policy, Donna was named sole beneficiary. After Gary’s death, the MetLife policy benefits were paid to Donna. Jeffrey argued to the court that she would have to turn the proceeds over to Jeffrey but the court ruled that ERISA rules required the proceeds to remain with Donna.

As it relates to the other policies, the proceeds of one State Farm policy with a death benefits of $75,000 was paid out in full to Sharon, the ex-wife. Both Donna and Jeffrey then made claims for the death proceeds from the two Prudential policies and the second State Farm policy. The carrier’s deposited the proceeds with the court awaiting the court’s decision.

The court was asked to decide whether the divorce decrees obligations to name Jeffrey a beneficiary of Gary’s life policy was temporary or permanent. The court concluded based on prior Wisconsin case law that in the absence of language limiting the duration of the beneficiary requirement that the decrees effect was to be permanent and that Jeffrey was to be the full beneficiary.

The lesson to be learned in dealing with beneficiary designations of life insurance policies that ambiguity creates wealth for attorneys through litigation. These unnecessary costs uncertainty and aggravation should serve as warnings of several things.  

  1. Upon divorce or separation, all dipositive documents should be reviewed and appropriately changed.
  2. Even though each state has its own laws concerning the impact of divorce, retirement plans and employee benefits that changes made to beneficiary designations following a divorce must be tailored to the provisions of those state laws as well as the divorce decree and/ or separation agreements.
  3. Critical attention must be made to the clarity and specificity of the parties intent with regard to the wording of documents drafted in connection with divorce or separation particularly where it involves life insurance or retirement plans.
  4. And often overlooked rule is to have backup beneficiaries and name them in any legal document in which a client disposes of property at death.
  5. Consider strongly the advisability of naming an individual as irrevocable beneficiary of a life policy.