Although there may be exceptions, it is usually a safe bet that a divorced person would not want their ex-spouse to be the beneficiary of their life insurance. This is particularly true when that ex-spouse is not the parent of the insured’s children. However, where life insurance coverage is an employment fringe benefit, such an unintended result can easily occur.
In Michigan, as in most states, a divorce usually automatically terminates the rights of both spouses as beneficiaries under life insurance coverage in respect to the other. Therefore, in connection with privately obtained life insurance, it is unnecessary to file a change of beneficiary form in order to terminate the ex-spouse’s status as a beneficiary. Many Michigan attorneys, and consequently their clients, believe that this circumstance is true for all life insurance coverage.
Unfortunately, this is not the case. Most employee benefit plans are exclusively regulated by a comprehensive piece of federal legislation titled the Employee Retirement Income Security Act, fondly known as ERISA. With some exceptions, ERISA by its own terms, preempts any state law which, if followed, would affect the way an employee benefit plan operates. Life insurance coverage provided to employees as a fringe benefit, (even where the employee contributes toward the premium), is usually found to be a plan regulated by ERISA. If the plan, usually a group policy, provides simply that the plan will pay the named beneficiary, then that language will be followed verbatim. Michigan law or the terms of a divorce decree will not prevent the distribution of the death benefit to the named beneficiary even if that named beneficiary is now an ex-spouse. This is clearly an unintended side effect of ERISA. Nonetheless, it exists as current law.
The following hypothetical illustrates how this fluke in the law can lead to an extremely unfair result.
Jenny Doe, a 36 year old single mother of two, marries Josh Black. Shortly thereafter, she becomes an employee of the Beneficial Company. Employees of Beneficial are entitled to $100,000 in group life insurance coverage as a fringe benefit. Upon her employment, Jenny fills out a form naming her new husband as the primary beneficiary and the two children as contingent beneficiaries. Two years later, Jenny and Josh are involved in a bitter divorce. The divorce decree clearly states that Josh’s interest as a beneficiary in any life insurance coverage is terminated. Jenny has her hands full recovering from the emotional impact of the divorce, attending to her job duties and raising two young children. Understandably, she relies on the divorce decree rather than going to the trouble of obtaining and filing beneficiary change forms. Two years later, she is tragically killed in an auto accident. Josh claims and receives the insurance proceeds even though this is the last thing Jenny would have wanted to happen.
The message is clear. If you know someone who is divorced and has life insurance coverage provided as an employee fringe benefit, they would be well advised to review their beneficiary designation for that coverage. If that named beneficiary is an ex-spouse, who is no longer an intended beneficiary, then a change of beneficiary form should be filed. If you are an employer that provides life insurance as a fringe benefit to your employees, you might consider having your human resources department issue a notice that a divorce decree may not affect a prior beneficiary designation, and that after a divorce, if a change in beneficiary is desired, the appropriate form must be obtained and submitted.