Spouses obtain a life insurance policy to replace income in case their spouse or another individual on whom they rely dies. However, this purchase may become a joint asset for both spouses, depending on how state laws treat life insurance policies, the type of funds used to purchase the premiums and the type of life insurance that is involved.
Community property is the property that either spouse acquires during the marriage. Generally, if the life insurance policy was acquired by using community funds, it is considered community property and is subject to division in the event of divorce. Courts have also recognized the cash surrender value of life insurance policies to be community property. The policy can be considered separate property if the spouse uses only funds that he had prior to the marriage to pay the premiums, thus keeping the policy from commingling with community funds or property.
The life insurance policy generally adapts to the form of premiums. For example, if the insurance policy premiums are paid with separate property funds and equally as often with community property funds, the insurance policy will be considered separate property for half of its value and community property for the other half.
Last Premium Rule
Term insurance might take the character of the premiums paid for the most recent period of coverage. This principle might apply because term insurance does not provide any benefit besides protection which has to be paid before each premium is due or the policy will lapse.
Other community property states have taken the approach that the policy cannot be rightfully owned during the beneficiary’s lifetime. Because a term insurance policy does not have any value until the insured dies, these states refuse to acknowledge this kind of policy as property while the insured is alive. Instead, these courts have held that the life insurance policy is separate property.
Amending Character of Property
Spouses can opt to change the character of property by entering into a separate written agreement. A separate property agreement allows spouses to change community property into separate property. To avoid challenges to these agreements, the agreements should be in writing, signed by both spouses and confirmed before a notary public. Placing the insurance proceeds in a trust without a separate property agreement will generally not amend its character.
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