Who Inherits Your Life Insurance: Spouse Or Beneficiary?

When you take out a life insurance policy, you can choose who will receive the benefit after your death. This person is known as the beneficiary. While many people choose their spouse, it is not a requirement, and you are free to name anyone else, such as a relative or friend. However, in community property states, the policyholder's spouse is automatically considered the beneficiary unless explicitly stated otherwise.

In community property states, the policyholder's spouse is automatically considered the beneficiary

In the US, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, any income or property acquired by either spouse during the marriage is considered community property and therefore owned equally by both partners. This includes life insurance policies, so in community property states, the policyholder's spouse is automatically considered the beneficiary.

This means that if the policyholder dies, their spouse will receive the life insurance payout, even if the policyholder has named someone else as the beneficiary. This is because the state considers the couple to be equal owners of all joint assets, including income earned during the marriage and benefits derived from it.

However, it's important to note that community property laws do not apply if the life insurance policy was obtained through work. In this case, group benefit plans are often subject to the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that takes precedence over state laws. Therefore, unless the surviving spouse is listed as the beneficiary of an employer-sponsored life insurance policy, they may not be entitled to half of the death benefit.

Additionally, Alaska, Tennessee, and South Dakota are considered "opt-in states," where spouses can choose to follow community property laws. On the other hand, the remaining 38 states follow a common-law property system, where ownership of marital assets is more straightforward and determined by the purchaser.

In some states, you must name your spouse as a beneficiary

In community property states, a spouse is automatically considered the life insurance beneficiary unless they indicate otherwise in the policy. These states include Alaska, Tennessee, California, Nevada, Washington, Texas, Arizona, Idaho, Louisiana, New Mexico, Wisconsin, and possibly more. In these states, both spouses own the money earned during the marriage and any property bought with that money equally. This includes life insurance policies.

If you live in a community property state, your life insurance payout will automatically go to your spouse, even if you have named someone else as the beneficiary. This is because the state considers you and your spouse to be equal owners of all joint assets, such as income earned during the marriage, property purchased with the money earned, and life insurance benefits.

In these states, the policyholder must receive the spouse's permission to list anyone else as the beneficiary. If there is a beneficiary other than the spouse, the spouse cannot override it but is usually entitled to half of the death benefit. This is because the law splits community property in half. So, half the benefits go to the spouse, and half to the listed beneficiary.

However, there are exceptions. Life insurance policies issued by federal agencies, such as the Federal Employees' Group Life Insurance (FEGLI) Program or the Service Member's Group Life Insurance, do not allow beneficiaries to be changed. The beneficiaries named are the ones who receive the life insurance death benefits, and the Employee Retirement Income Security Act governs these policies, overriding state laws.

The insured has the right to choose any beneficiary they wish

In most states, the insured must explicitly name their spouse on their policy for them to receive the benefit. However, in community property states, the policyholder's spouse is automatically considered the beneficiary. These states include:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Additionally, Alaska and Tennessee are considered “opt-in states,” meaning spouses can decide to opt in and participate in the state’s community property laws.

In a community property state, both spouses own the money equally earned during the marriage and any property bought with that money. This includes life insurance policies. If a spouse uses community property to pay the life insurance premiums, their spouse has the right to a portion of the life insurance proceeds. The extent to which the life insurance is considered community property depends on the type of policy.

It is important to note that the insured can refuse to name beneficiaries. If the insured has no beneficiary, the death benefit defaults to the estate as the life insurance beneficiary, potentially undergoing a lengthy probate process.

The policy owner can change their designation

If the policy owner chooses to make the beneficiaries irrevocable, they cannot be changed without the beneficiary's consent. On the other hand, revocable designations can be easily altered. To be valid, a beneficiary change or designation must follow the rules outlined in the life insurance policy and must be received, approved, and recorded by the insurance company.

It is important to regularly update your life insurance policy's beneficiaries to reflect changes in your life and ensure your intentions are met. This can be done by contacting your insurance provider, filling out a change form, and submitting any necessary documentation.

If there is no named beneficiary, the money goes to the insured's estate

If there is no named beneficiary on a life insurance policy, the money goes to the insured's estate. This means that the money will be subject to probate, a legal process where a court determines how the insured's assets are distributed. Probate can be a lengthy and costly process, potentially delaying the disbursement of the death benefit to loved ones. It can also result in higher taxes and fees, reducing the amount that goes to the insured's heirs.

The probate process can be avoided by naming a beneficiary on a life insurance policy. Most life insurance companies require the policy owner to name at least one primary beneficiary. If the primary beneficiary dies before the insured or at the same time, and no contingent (secondary) beneficiary is named, the policy's payout will go to the insured's estate. To prevent this, policyholders should regularly review and update their beneficiary designations.

In some cases, such as in community property states, the surviving spouse may automatically receive the life insurance proceeds when no beneficiary is named. However, this is not always the case, and the insured typically has the right to choose any beneficiary they wish. It is important to note that life insurance policies are separate from an individual's will or other aspects of their estate, so it is recommended to name a beneficiary even if a will has been created.

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