Yes, life insurance proceeds are generally considered marital property in most states. This means that both parties can claim a portion of the money from the insurance policy when a couple divorces. Any funds acquired during the marriage by either party through life insurance policies would be subject to division in divorce proceedings as part of the assets shared between spouses.
Contents:
- Definition of Life Insurance
- Overview of Marital Property in Divorce Settlements
- Who Is the Owner of the Life Insurance?
- State Laws Regarding Marital Property and Life Insurance Proceeds
- Treatment of Benefits During a Divorce Settlement Agreement
- Taxation of Life Insurance Proceeds Received by a Survivor
Definition of Life Insurance
Life insurance is a contract between an insurer and the policyholder. The insurer agrees to pay out a predetermined sum of money (the death benefit) to the listed beneficiaries upon the policyholder’s death, in exchange for premiums paid by the insured into their life insurance plan. The beneficiary can use this money to cover funeral expenses, debts, or provide income replacement during difficult times.
The primary function of life insurance policies are to reduce financial burdens for family members or other beneficiaries should anything happen to the policyholder. This is especially true if that person has significant debt or there is not enough liquid assets available at their passing in order to pay off any outstanding bills or mortgages. With a life insurance policy in place, those individuals will receive necessary funds without taking on extra debt with high interest rates.
It’s important to remember that while payments from a deceased’s life insurance plan are not always considered part of his/her estate when it comes time for distribution – depending on state law – they may still be deemed marital property if acquired after marriage and owned until death.
Overview of Marital Property in Divorce Settlements
When a marriage ends in divorce, marital property is divided between the two parties based on equitable distribution. This means that assets and debts incurred during the course of the marriage are equitably shared in accordance with applicable laws and statutes. Generally speaking, any income or asset acquired by either spouse throughout the marriage is considered part of the marital estate for purposes of division in a divorce settlement.
In most cases, life insurance policies issued prior to or during the marriage will be included when it comes time to divide assets fairly between ex-spouses. Depending on state law and policy provisions, beneficiaries of these policies may include spouses or ex-spouses at least partially or wholly as designated by agreement.
The rules around dividing life insurance proceeds depend upon whether they are paid out as cash surrender values or death benefits during divorce proceedings. Where allowed under relevant laws, some couples choose to designate each other as beneficiaries to ensure that their surviving partner will have access to financial resources should one pass away first. Ultimately, such determinations must be made in accordance with applicable state requirements governing matters related to estate planning and distributions after divorce settlements have been finalized.
Who Is the Owner of the Life Insurance?
Life insurance policies can be owned by the insured, their spouse or both. The insured is the individual whose life is covered by the policy and the owner of a policy has rights to manage and transfer it. When deciding who should own the life insurance policy in a marriage, spouses must consider what each stands to gain or lose if one or both are listed as owners.
In some states such as California, court rulings have determined that when one spouse pays all premiums on a policy with his/her money, any proceeds will belong to them even though they name their wife/husband as beneficiary. But this doesn’t necessarily mean that regardless of who pays for premiums, proceeds will remain within the marital estate. Some states allow couples to sign an agreement clarifying how life insurance should be treated after death; including which party will own the policy during their lifetime and whether or not proceeds will become part of the marital estate upon death of either partner.
There may also be implications for income tax filing purposes based on who owns the life insurance policy. If this is important to you then you should consult your financial advisor about possible strategies associated with ownership status before signing any contracts or purchasing policies jointly-held between spouses.
State Laws Regarding Marital Property and Life Insurance Proceeds
Divorce can be an emotionally trying process, so it is important to know the state laws regarding marital property. Many people are unaware that life insurance proceeds can fall under the category of marital property and, as such, could potentially be used in the division of assets during a divorce settlement.
The exact rules governing how life insurance benefits are distributed during a divorce vary from state to state. Generally speaking, some states classify life insurance policies purchased before or during a marriage as community property and split between both parties regardless of who initially purchased the policy. In other states, only those benefits acquired while married may be considered when splitting assets and debts.
It’s vital to understand your specific local laws so you don’t end up getting short changed on your share of any potential life insurance benefit payout at the time of divorce. The best way to ensure this does not happen is to talk with a legal professional who specializes in family law for advice about what might happen should you encounter a dispute about whether certain funds should be classified as marital property or not.
Treatment of Benefits During a Divorce Settlement Agreement
When it comes to a divorce settlement agreement, life insurance proceeds can often be an essential part of the equation. Depending on your state’s laws and how the policy is structured, these funds may be considered marital property and therefore subject to equitable distribution as part of the final divorce decree.
In some states, if one spouse takes out a life insurance policy that names the other spouse as beneficiary prior to filing for divorce, then this could make the proceeds non-marital property. However, in most cases even if both spouses name each other as beneficiaries on their policies after they are married, this designation is still subject to scrutiny when dividing marital assets during a divorce.
The treatment of life insurance benefits will generally depend on whether or not it was classified as separate or joint property when acquired by either spouse during marriage. If both parties agree that the life insurance money should be used for spousal support or child support payments then an amendment must be made to ensure that language is included into the final settlement agreement. Otherwise, funds from any existing policies may need to be liquidated in order for them to become available for use in a marital dissolution case.
Taxation of Life Insurance Proceeds Received by a Survivor
Taxation of life insurance proceeds received by a survivor can be complex. Depending on the relationship between the deceased policy owner and beneficiary, this financial benefit may be subject to federal income tax, state estate tax or other forms of taxation. The taxable amount also varies depending on whether the policyholder was legally married or not at the time of death and if certain criteria are met.
If the policyowner has made gifts to a non-spousal beneficiary (including charitable institutions) within three years prior to their passing, the Internal Revenue Service may treat those distributions as part of their estate for taxation purposes. If this is the case, then all proceeds from any life insurance policies may also be classified as estate assets which could incur an estate tax before being paid out to any surviving parties.
If there is a legal spouse who is listed as both primary beneficiary and irrevocable owner on an existing policy, but they pass away after divorce proceedings have begun then those funds will likely still go directly to them even though they are no longer considered legally married in some states such as Ohio. This means that while there is a possibility that assets would remain subject to taxation due to federal laws; marital property laws typically do not apply in this scenario unless otherwise specified by a court order or living trust agreement signed prior to death.
