California Life Insurance Beneficiary Laws: Rules You Need to Know to Receive the Proceeds

Life insurance provides financial security for a person’s loved ones after the insured’s death. Understanding the rules and regulations surrounding life insurance beneficiaries in California is essential. In this article, our attorneys will explore the key facts about California life insurance beneficiaries.

What Is a Life Insurance Beneficiary?

A life insurance beneficiary is the person or entity that receives the death benefit from a life insurance company after the insured person passes away. The beneficiary can be a person, such as a spouse or a child, or an entity, such as a trust or charity.

Choosing a Beneficiary

When people apply for a life insurance policy, they are asked to choose a beneficiary. The policy owner can name one or more beneficiaries, and he/she can change the beneficiary at any time by updating the policy. It is important to choose the beneficiary carefully. Failure to update your beneficiary after major life events can result in your assets being distributed to unintended individuals.

California Life Insurance Beneficiary Laws Basics

In California, life insurance beneficiary designations can be governed by policy provisions, state and federal laws. A policy owner can make a beneficiary designation when they apply for the policy initially, and they have the right to change the beneficiary at any time during their lifetime as long as the change complies with the policy provisions for beneficiary change — advising the insurance company if the beneficiary’s status changes is prudent. For example, if a beneficiary is a spouse of the insured but the couple later divorces, informing the insurance company of the divorce and re-naming the former spouse as the beneficiary may protect the policy from being challenged after the insured’s death.

If an insured person passes away and the policy does not have a valid beneficiary designation, the death benefit will be paid according to the policy provisions regarding beneficiaries. Every life insurance policy has a paragraph about beneficiaries and how the benefit is paid out. It mentions what happens to the proceeds if no beneficiary is on the policy. In some cases, the benefit is paid to the insured’s estate; in others, it goes to the next of kin.

Contesting a Beneficiary

Someone may contest a life insurance beneficiary, challenging their right to receive the death benefit. This can occur if there are questions about the validity of the beneficiary designation or if a beneficiary is accused of exerting undue influence over the policyholder. In addition, beneficiary validity may be contested if there was a last-minute change or if the insured person was mentally incapacitated at the time the beneficiary was designated.

If a beneficiary is contested, it can result in a lengthy legal battle that can be time-consuming and expensive. This is why it is important that you work with a qualified life insurance attorney if someone is challenging your right to receive the life insurance payout in California.

Life Insurance Beneficiary Designation and Divorce in California

A divorce can present many issues for life insurance policyowners as well as beneficiaries. Once a couple goes through a divorce, a copy of the divorce decree should be sent to the insurance company to ensure they update the record. If the ex-spouse is to remain on the policy as a beneficiary, the policyowner should rename the ex-spouse and change their status from ‘spouse’ to ‘former spouse’. This will help avoid issues if someone tries to challenge the beneficiary designation following the insured’s death. 

Group life insurance policies are different from individual policies in California. Group life insurance policies usually allow employees to enroll their eligible dependents for family coverage. A spouse qualifies as an eligible dependent, but an ex-spouse is usually not considered a dependent. Many divorced employees continue to pay for their ex-spouse’s life insurance, not knowing that their claim will be denied after the ex-spouse’s death because an ex-spouse is not considered an eligible dependent.

Life Insurance Proceeds and Community Property in California

California is a community property state. When life insurance premiums on a policy issued during the marriage are paid with community property funds, the resulting policy is an asset to the community. The surviving spouse’s interest trumps a gift of the policy proceeds to a third party named as beneficiary without the spouse’s consent. If the spouse is the beneficiary of the insured spouse’s policy, this is a gift of community property to the beneficiary spouse. At the death of the insured spouse, the policy proceeds vest in the beneficiary spouse as his or her separate property. 

Life insurance proceeds are subject to the general rule that a spouse cannot dispose of community personal property without either the spouse’s written consent or consideration. The rights of a spouse to recover the community share of an insurance policy are separate and distinct from any right the spouse may have due to being named as the beneficiary of the insurance policy. Thus, one spouse has the power to give his/her half of the insurance policy proceeds to a third-party beneficiary but not the other spouse’s half.

The husband has the power to give his community share of insurance proceeds to the named beneficiary but not the wife’s half. A spouse may execute a written release of his or her community interest in an insurance policy on the other spouse’s life. After such a release is signed, the spouse, if named as a beneficiary under the other spouse’s policy, retains an expectancy of a gift that will occur at the time of the insured’s death.

Is Life Insurance Considered a Marital Asset in California?

Usually, life insurance policies purchased during the marriage with community funds are considered community property. Under the general rule, the proceeds of a life insurance policy are characterized as separate property or community property to the extent the insurance policy was acquired with separate property funds and community property funds.

Spouse Beneficiary Rules for California Life Insurance Policies

While the spouse does not automatically become the beneficiary on a life insurance policy, he/she may claim half of the benefit after the insured spouse’s death if the policy was purchased during marriage and the premiums were paid with community funds. Suppose the insured spouse designated someone other than the spouse as a beneficiary on such a policy. In that case, the spouse’s community property right to half the benefit will override the beneficiary designation.

ERISA and California Life Insurance Beneficiary Law

ERISA usually governs employment-related group life insurance policies. Since ERISA is a federal law, it often trumps conflicting state laws. For example, if a couple divorces and the wife expressly waives her right to the husband’s life insurance policy but remains the beneficiary on his group life insurance policy after the divorce, the divorce decree would contradict the beneficiary designation. Since the divorce decree is a state court document and ERISA governs a group life insurance policy, the designation may trump the divorce decree’s waiver.

If the insurance company pays to the ex-spouse as a named beneficiary in such cases, the insured’s estate or close family may try to challenge such payout and sue the ex-spouse after the payment has been made. Many federal and state courts have concluded ERISA does not preempt postdistribution lawsuits against beneficiaries and has allowed individuals and estates to pursue such claims. Beneficiary disputes involving similar fact patterns are very common so it is prudent for couples considering divorce to consult with an ERISA life insurance attorney to make sure the insured’s wishes are carried out after their death.

Can a Beneficiary Spouse in California collect a policy that has lapsed?

A lapsed life insurance policy is a policy that was terminated for nonpayment of premiums. Premiums paid into the policy are not returned, and such policies cannot be reinstated after the insured’s death. Consequently, a beneficiary spouse cannot collect the death benefit if the policy has lapsed. Insurance companies have many duties when it comes to terminating policies due to life insurance lapses in California. They may be liable for the death benefit if they do not follow certain laws pertaining to terminating policies due to nonpayment of premiums.

Beneficiary Disputes in California

Life insurance beneficiary disputes are very common. They usually involve a former spouse, a divorce decree obligating the insured spouse to maintain the policy and a beneficiary change. Beneficiary disputes also occur when one spouse waives his/her rights to a policy during divorce but remains a beneficiary on a life insurance policy. Beneficiary disputes and lapsed policies are some of the most common reasons life insurance claims get denied in California. Such cases are very complex and need to be handled by an experienced life insurance lawyer.

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About the author

Attorney Tatiana Kadetskaya has over 10 years of experience in life insurance law representing beneficiaries and policy owners. She is best known for successfully collecting denied and delayed claims and settling complex beneficiary disputes and interpleader lawsuits.

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