As circumstances change, matrimonial practitioners must review the law in certain areas to see if those laws need to be amended to keep pace with changing times. For example, the onset of AIDS has created almost a new class of terminally ill people. These people who are involved in divorce cases may find themselves in a legal conundrum when it comes to term life insurance benefits. Traditionally, under prior law in some states, only cash surrender value was deemed property. See, e.g., In re Marriage of Mullins, 121 Ill.App.3d 86, 458 N.E.2d 1360 (Ill. 4th Dist. 1984). Historically, term policies, therefore, had no value in divorce proceedings. Those cases, however, may be distinguishable where the insured was not terminally ill, and the proceeds therefore become much less speculative. Those cases were also decided before the appearance of Viatical Settlement Acts (designed from the National Association of Insurance Commissioners Model Act) changed the public policy of many states. Those Acts specifically allowed insurance policies, including term policies, to be sold (albeit normally at a deep discount).
I was recently involved in a case where my client was terminally ill. His wife owned a term policy on his life and claimed it should be awarded to her at a zero value. In such a situation, you might want to have a viatical company make an offer on the policy. It will be hard for your opponent to argue the policy isn't worth at least what the company is offering. Further, you could make a dissipation claim if the side that owns the policy, refuses to take the offer, or, if feasible, consider asking the court to order the parties to effectuate the transaction.
More recently, some states that have dealt with the issue of whether term life policies are property subject to division in divorce have answered in the affirmative. See, e.g., Willoughby v. Willoughby, 758 F.Supp. 646 (U.S.D.C. Kansas 1990) (life insurance policy beneficiary's right to receive proceeds is marital property, not a mere expectancy, where the policy was purchased during the marriage and at least some of the premiums were paid by the husband's wages earned during the marriage). A contractual right to receive money upon the death of one party is nothing more than a contractual right. It is no different from stock options acquired during the marriage, which in many states are marital property, even if not vested, and even if their value cannot be ascertained. Hmelyar v. Phoenix Controls, 339 Ill.App.3d 700, 791 N.E.2d 695 (Ill. 2d Dist. 2003). Green v. Green, 64 Md.App. 122, 494 A.2d 721 (C.S.A. Md. 1985). Nor is a life insurance policy any different from pension rights, which even if not vested, are generally marital property. In re Marriage of Bodford, 94 Ill.App.3d 91, 418 N.E.2d 487 (Ill. 2d Dist. 1981). Lemon v. Lemon, 42 Ohio App.3d 142, 537 N.E.2d 246 (C.A. Ohio 1988). Where a marital settlement agreement requires an insured to maintain life insurance for the benefit of a particular beneficiary, that beneficiary has been held to have an enforceable, equitable right to the proceeds. Smithberg v. Illinois Municipal Retirement Fund, 192 Ill.2d 291, 735 N.E.2d 560 (Ill. Sup. Ct. 2000).
Yet some courts have struggled with this concept. In California, for example, in In re Marriage of Gonzalez, 168 Cal.App.3d 1021 (Court of Appeal, 4th Dist., Division 3, California 1985), an appellate court specifically held that although there was no cash surrender value to two term life insurance polices, the policies had an economic value and should not have been awarded without a determination of those values. In that case, term life insurance coverage was compared to pension rights, which were held to be a contractual right, a chose in action, not an expectancy. The court accepted argument that "replacement value may be significantly higher than cash surrender value in situations where the insurability of the insured is lessened because of advancing age or declining health, and the existing policy cannot be cancelled or contains a guaranty of insurability." Id. at 1025. A different appellate court district in California in In re Estate of Logan, 191 Cal.App.3d 319 (Court of Appeal, First Dist., Division 5, California 1987) held that under different facts, the former wife was not entitled to the life insurance proceeds, because the former husband was insurable when he commenced paying premiums with post-separation property earnings. The court stated:
"We believe the correct rule to be that term life insurance covering a spouse who remains insurable is community property only for the period beyond the date of separation for which community funds were used to pay the premium. If the insured dies during that period the proceeds of the policy are fully community ... If the insured becomes uninsurable during the term paid with community funds, then the right to future insurance coverage that cannot otherwise be purchased is a community asset to be divided upon dissolution." Id. at 325-326. The court continued,
"We do not minimize the difficulty of valuing the right of the insured who is no longer insurable to obtain continued coverage. The need to value this right will rarely arise since, as here, the insured will usually be insurable at the conclusion of the term paid with community property funds. An uninsurable person's right to continued insurance coverage is a valuable right and expert testimony can undoubtedly establish its value" (emphasis added). The court also stated that it suspects "a better measure might be the actuarial present value of the proceeds payable under the policy, considering the shortened life expectancy resulting from whatever has caused the uninsurability." Id. at 326. Consequently, you might want to hire an actuary to testify as to the value of a policy, depending on various possible dates of death (the foundation of which could be a physician's report).
You can also argue that, if the policy has no value, then your terminally ill client must be awarded the policy due to the spouse's lack of insurable interest. In some states the only way that a former spouse can have an insurable interest in the ex-spouse's life, is if there is an obligation to maintain insurance for security for alimony. See, e.g., Begley v. Miller, 137 Ill.App. 278 (Ill. 1st Dist. 1907). It is also a matter of common sense, as the Court of Appeals of Hawaii recognized in Epp v. Epp, 80 Hawaii 79, 905 P.2d 54 (1995). In that case it was held that "In the absence of (a) a valid and enforceable premarital agreement, marital agreement, and/or divorce decree agreement requiring such an order, (b) a valid and enforceable legal obligation requiring divorcing marital partner A to pay some form of child support, spousal support, retirement benefits, and/or some other payment to divorcing marital partner B after divorcing marital partner A's death or (c) a compelling reason on the record for such an order, the family court abuses its discretion when it orders divorcing marital partner A to allow divorcing marital party B, at divorcing marital partner B's expense, to continue to be the beneficiary of insurance payable on the death of divorcing marital partner A. For obvious reasons, the family court should not give one divorcing marital partner any more motivation to desire the demise of the other divorcing marital partner than he or she may already have" (emphasis added).
To try to arrive at a practical compromise, you could probably at least secure an order equally dividing the proceeds between your client's estate and his soon-to-be ex-spouse. That is akin to dividing retirement benefits or stock options on an "if, as and when" basis. As can be seen, some creative approaches can assist your client (and his or her estate) in gaining an equitable property split, and in avoiding a windfall to your opponent.
Paul L. Feinstein, a Chicago sole practitioner with over 30 years of experience, concentrates his practice in family law with emphasis on divorce litigation, custody and visitation, and appeals. He can be reached at (312) 346-6392. View his Divorce Magazine profile.
Certified Divorce Financial Analyst
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