In divorce, a critical issue impacting the treatment of insurance policies is whether the policy benefits are separate property or marital property. State divorce courts have reached varied answers on the question of whether a life insurance policy is separate or marital property. In some states, “whole life” insurance contracts have been held to be marital property and generally have been valued at their cash surrender value. “Term life” policies, on the other hand, which lack a surrender value, have not been considered divisible property. In states in which inheritances or gifts are classified as separate property, insurance proceeds usually are not treated as marital property for purposes of property distribution in divorce. Other courts have ruled that the proceeds of a life insurance policy purchased with community property should be treated as community property in a divorce.

Another important issue relating to insurance policies is whether the insurance benefits should be part of the divorce property settlement or part of continuing support (in which the life insurance policy is used as a guarantee of future support payments). In cases in which the policy has been made part of continuing support, voluntary agreements between divorcing spouses to maintain insurance for that purpose have been implemented.

Accordingly, given the importance of accurately classifying insurance policies for purposes of property distribution, divorcing parties should be aware that the following issues all will have relevance to the eventual disposition of the policy’s benefits: (a) the cash surrender value of the policy; (b) the beneficiaries; (c) the type of policy (whole life vs. term life); and (d) the source of funds for payment of the policy premiums.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.