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Life Insurance and Divorce: The Rights of Legally Mandated Beneficiaries, Part 1

 

As a general rule in Tennessee life insurance policy cases, a beneficiary named in a life insurance policy does not have a vested interest in the policy’s proceeds when the person whose life is insured dies. If the owner of the policy retained the right to change the beneficiary, which is almost always the case, he or she can do so.  Absent fraud, undue influence or lack of mental capacity, an owner can change the beneficiary of the life insurance policy any time before his or her death.

There is one notable exception to the above general rule which comes up sometimes in Tennessee life insurance policy cases. When someone is ordered to name a spouse, or his or her children, as beneficiaries of a life insurance policy as part of a divorce decree, then, any change that person makes before his or her death which contravenes the divorce decree may well be ineffective.

In Holt v. Holt (Tenn. 1999), the divorce decree required the Ex-Husband to acquire a $100,000 life insurance policy and to name his son (“Son”) as beneficiary.  The Ex-Husband, however, did not comply with the terms of the divorce decree.  Instead, he purchased two policies: a $50,000 policy, for which he designated his mother (“Mother”) as beneficiary; and, a $40,000, policy for which he designated Son as beneficiary.  So, Ex-Husband under insured Son by $60,000.

The Ex-Husband passed away, and the Ex-Wife, looking out for Son, sought enforcement of the divorce decree. When Ex-Wife and Son sued, they named Mother as a defendant to the lawsuit on the grounds that the $50,000 of life insurance proceeds for which she was the designated beneficiary should be paid to Son.

Mother died after Ex-Wife and Son brought suit. The administrator of her estate was substituted in her place and argued that the Ex-Wife and Son were not entitled to the proceeds of the $50,000 policy. She argued that their only remedy was to obtain it from the assets of Ex-Husband’s estate, which did not include the life insurance policy benefits of the policy payable to Mother.

The Supreme Court of Tennessee disagreed with the position of Mother’s administrator. Stating that it considered “principles of law as well as principles of equity,” the court determined that the divorce decree gave Son a “vested right to any life insurance policy” obtained after the divorce decree was entered by the Ex-Husband. It held that Son should receive, through a constructive trust, the full proceeds of the $50,000 policy in which Mother was designated as beneficiary.

 

Prior to Holt v. Holt, courts in Tennessee routinely held that, when a life insurance policy existed at the time of the divorce, and the divorce decree required that the policy benefits be paid to a certain person, then, that person had a vested interest in the proceeds.  Under that line of cases, even if the ex-spouse changed the beneficiary in violation of the terms of the divorce decree, the person to whom the divorce decree mandated proceeds be paid still received the proceeds.

The Holt case expanded that general rule to cover policies purchased by the ex-spouse after the entry of the divorce decree. Tennessee life insurance lawyers can also use Holt as a tool to collect for a mandated beneficiary from the proceeds of a life insurance policy procured after the divorce decree in which someone other than the beneficiary mandated by the divorce decree was named as beneficiary.