Failing to Update Your Life Insurance Beneficiary May Mean Your Ex-Spouse/Partner Receives the Proceeds

S.Ct. BuildingRarely does the Supreme Court weigh in on issues related to estate planning but in this term, it did just that.  The Court’s decision In Hillman v. Maretta centered on what happens when a decedent’s life insurance beneficiary is his ex-spouse, i.e., the decedent did not change the beneficiary designation after their divorce. Many states have laws addressing this circumstance. For example, in Colorado, state law dictates that upon divorce, any life insurance beneficiary designation naming the person’s ex-spouse is automatically revoked.  Virginia law, the state out of which the Hillman decision arose, has a similar law.  The Virginia law is two-fold.  First, it provides any designation of a spouse is deemed revoked upon divorce and the proceeds will be distributed as if the designation had never been made.  Second, it provides if the first part of the law is held to be preempted, then whoever would be entitled to the life insurance proceeds under state law may sue the former spouse to recover any proceeds paid.

In Hillman, the decedent was a federal employee and the life insurance policy at issue fell under the Federal Employees’ Group Life Insurance Act (FEGLIA).  FEGLIA provides that the proceeds of federal life insurance policies shall be paid to designated beneficiaries before anyone else.  There was no disagreement among the parties that FEGLIA preempted the first part of the Virginia state law regarding automatic revocation of an ex-spouse beneficiary. However, the dispute centered on the second part and those defending the state law argued that in FEGLIA, Congress was merely striving for the administrative convenience of knowing where to pay the funds, a convenience not disturbed by a subsequent lawsuit between the parties to recover those funds.

The Court rejected that argument.  Relying on legislative text and history, the Court reasoned that Congress sought not only administrative convenience but also to honor the employee’s choice of beneficiary.  The Court held that FEGLIA preempted both sections of Virginia’s law as interfering with Congress’ legislative scheme, because Virginia law hinges on a finding that the proceeds actually ‘belong’ to someone other than the named beneficiary.  The Court acknowledged that “[o]ne can imagine plausible reasons to favor a different policy” as employees often forget to update beneficiaries following divorce.  However, the fact remains, FEGLIA does not provide an exception or divorce revocation and under the principles of preemption, it controls over Virginia’s state law in this area.

In Hillman, this meant that the insurance proceeds went to the decedent’s ex-wife, rather than to the woman that was his wife at the time of his death.

Though this decision is limited to life insurance policies tied to federal employment, it serves as a reminder to review and update your estate planning regularly, including your life insurance beneficiary designations.

To read the opinion in its entirety, go here.