What Happens to Life Insurance on Divorce?
The Texas Family Code was amended in 1997 to correct an anomaly in Texas law regarding the disposition of certain rights in life insurance policies
Who gets to be a beneficiary?An individual has the right to name whomever they would like as their beneficiary -- UNLESS a divorce decree or similar order requires a pledge of the policy. For instance, it is common to secure child support by designating one's former spouse as trustee for benefit of the parties' minor children. Under Texas Family Code Section 9.301, if a divorce decree is rendered AFTER an insured designated the insured's spouse as a beneficiary under a policy in force at the time of the rendition of the Divorce Decree, a provision in the policy in favor of the insured's then FORMER spouse is ineffective UNLESS:
1. the Decree lists the insured's former spouse as beneficiary;
2. the insured lists the former spouse as a beneficiary AFTER the entry of the Decree;
3. the former spouse is granted the right to receive benefits as a trustee for the benefit of the a child or dependent of either spouse.
What happens to the money if the appropriate steps were not taken?Pursuant to Texas Family Code Section 9.301(b), "the proceeds of the policy are payable to the named alternative beneficiary, or, if there is not a named alternative beneficiary, then to the estate of the insured."
What if the insurance company erroneously pays to a beneficiary under an ineffective designation?If an insurance company pays the proceeds of an insurance policy issued by the company to a beneficiary under a designation that is ineffective under section (a), the company is liable for payment to the person or estate pursuant to section (b) only if: prior to payment of the proceeds to the designated beneficiary, the insurance company receives written notice at the home office from an interested person that the designation is ineffective under section (a); and (b) the insurance company has not interpleaded the proceeds into the registry of a court of competent jurisdiction per the Texas Rules of Civil Procedure.