Characterization of Life Insurance Policies in Family Law

Two important cases dealt with life insurance in the family law context. Both cases address life insurance issues in novel ways. In re: Marriage of Valli addresses the characterization of whole life insurance policies and the presumption of title. In re: Marriage of Burwell addresses the split of authority regarding the characterization of term life insurance proceeds in family law matters and fashions a formula for allocated division. 

In re: Marriage of Valli (2014) 58 Cal.4th 1396

During the 20 year marriage the Husband purchased a whole life insurance policy on His life with undisputedly community funds.  The purchase was after discussion with Wife while Husband in hospital for heart problems.  Husband purchased the policy with community funds and designated Wife as owner and beneficiary of policy.

Wife, through her lawyers, argued that the policy was her separate property under Evidence Code §662 presumption of title, contending the transmutation requirements of Family Code §850 only apply to inter-spousal transactions and not transactions involving a third party.  Husband argued that the policy was community property because it was purchased during the marriage with community funds and there was no valid transmutation agreement. 

The California Supreme Court rejected Wife’s argument, and determined that Evidence Code §662 does not apply to the extent that it conflicts with the transmutation statutes. The Court reasoned that §850 was enacted to avoid a “rule of easy transmutation” and Wife’s attempt to create an exception to the transmutation requirements subverted this aim.  

The Court left open whether Evidence Code §662 presumption of title may apply in any family law proceeding.  Justice Chin’s concurring opinion argued strongly that “neither the common law nor section 662, which codified that rule, ever applied to characterizing property acquired during marriage in actions between the spouses” and therefore §662 should never apply to a family law proceeding in any capacity.

In re Marriage of Burwell (2013) 221 Cal. App. 4th 1

The Husband purchases a term life insurance policy during marriage to Wife #1.  A status-only divorce of this marriage was subsequently entered (divorce court retained jurisdiction over all other issues).  Husband then changed the beneficiary on the term life policy to Wife #2 and continued to pay premiums.  Husband failed to list the policy in his preliminary declaration of disclosure or final declaration of disclosure in the divorce action with Wife #1, during the pendency of which Husband committed suicide.  

The parties disputed characterization of the funds from the insurance benefit payout.

The community initially purchased this right and maintained it for a period of time through the payment of subsequent premiums.  Therefore, the right of renewal is, at least in part, community property.  However, separate property premiums were necessary to entitlement to the insurance benefit actually paid out.

If the insured spouse renews the policy post-separation, and the premiums would have been higher without the premium cap, the insured spouse has necessarily appropriated property which the community acquired and helped maintain.  In this situation, the community should receive a fraction of the proceeds based on two factors:

  1. the community’s role in maintaining the contractual right to a premium cap and
  2. the premium cap’s role in the separate estate’s acquisition of the final term of coverage.  The fraction would be computed as follows:

(% of total premiums paid by community) x (eff. premium discount for final term)
(actual premium paid for final term) + (eff. premium discount for final term)

Therefore, the proper characterization of term life insurance proceeds depends on a number of factors, including whether the final premium was paid with community or separate property, whether the insured became uninsurable during a term for which the premium was paid by the community, and whether the policy contained a premium cap when the separate estate began making payments.
The proceeds are entirely separate property when:

  1. separate estate has paid the final premium;
  2. the insured spouse was insurable at the end of the last term paid for by the community; and either
    1. the insured spouse’s health was such that he/she could have purchased a comparable policy at a comparable price when the separate estate began making premium payments, or
    2. the policy did not contain a premium cap when the separate estate began making premium payments.

The proceeds are part community and part separate where:

  1. the separate estate has paid the final premium with funds that are part community and part separate; or
  2. the insured spouse has become medically uninsurable before he/she began paying the premiums with separate property; or
  3. the insured spouse could not have purchased a comparable policy at a comparable price when he/she began paying the premiums with separate property.

Conflicting Case Law re: Term Life Policy

It should be noted that Burwell dealt with insurance proceeds from the term insurance policy.  On the issue of whether term insurance itself is to be treated as “property” for purposes of marital actions, the appellate courts have adopted four different views.

  1. Term insurance is not property subject to division.  Marriage of Lorenz (1983) 146 Cal.App.3d 464, 468.
  2. Term insurance is property subject to division.  Marriage of Gonzalez (1985) 168 Cal.App.3d 1021.
  3. Term insurance is property subject to division only when the insured dies or becomes uninsurable during the period for which community funds were used to pay premiums.  Estate of Logan (1987) 191 Cal.App.3d 319.
  4. Adopts the Logan view except where insured becomes uninsurable during the period for which community funds were used to pay premiums, in which even the policy is not subject to division, because the insured had no enforceable right to renew.  Marriage of Spengler (1992) 5 Cal.App.4th 288.