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What Is a Community-Property State and Does It Affect Life Insurance?

May 18, 2018
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For community-property rules to apply, there must be two things in play: a valid marriage and a residence in a community-property state.

In the U.S., most states use the common-law system; the other states use community-property. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Living in one of these states can have an effect on a couple’s finances. However, keep in mind that while these states share some common features and definitions, there is no one uniform community-property system.

Essentially, any assets that are accumulated during marriage in a community-property state are owned jointly and if there is an annulment or divorce then assets are split equally no matter who earned them. If a couple amicably splits, community-property laws may not even come into play if the individuals can agree on who gets what. A pre-nuptial agreement also tends to trump community-property laws.

It’s important to note that this article is not intended to be legal advice; it’s simply an educational overview of community-property. Talk with a lawyer for specifics on community-property state laws and how they can affect your specific situation.

History of the Community-Property System

Brought to America by Spanish and French colonists, this concept was intended to encourage equality. Because a marriage is a community consisting of two marital partners who, through their joint labors and efforts, contribute to the prosperity of the marriage, both spouses possess an equal right to the property and its benefits.

Community-Property States: Assets Owned Prior to Marriage

Any assets a person owned before joining in matrimony are typically still considered separately owned. For example, if Jane Doe owned a home before she married John, the home doesn’t automatically become John’s property after marriage, even if living in a community-property state. Things can get tricky though if you get divorced and did not take inventory of what you owned prior to marriage.

Other than assets owned prior to marriage, other property that is considered separate in a community-property state may include:

  • Property acquired by gift
  • Property acquired by inheritance or bequest from a will
  • Property acquired in a court award

Changing Status of Property in a Community-Property State

Most community-property states allow spouses to determine or change the character of their property as community or separate. The legal term for this action is transmutation. There are two important transmutation restrictions:

  1. Federal law obligations cannot be avoided by transmuting property;
  2. A transmutation that is effective between spouses may not be effective against third parties like creditors.

If married couples move from a community-property state to a common-law state, this does not change the character of the marital property acquired in the community-property state unless the couple takes steps to change the status.

Overall, if you live in a community-property state, it’s not a bad idea for spouses to keep organized records of their personal financial matters.

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Life Insurance and Community-Property

So, how do community-property laws affect life insurance policies?

Generally, policyowners have a lot of flexibility on who they want to name as a beneficiary of their policy. Many times a policyowner will name a spouse as a beneficiary, but sometimes not. They can name an adult child, parent, or even a close friend; however, if they live in a community-property state and income earned during the marriage is used to pay the premiums then typically the spouse legally has rights to 50% of the death benefit.

Example: John Doe lives in California and has a term life insurance policy in which he designates his mother and father as the beneficiaries. He then marries Jane Doe, but forgets to update the policy. He unexpectedly dies but because they live in a community-property state and John paid premiums with “jointly owned” income, Jane automatically receives half of the death benefit, with the remaining half going to John’s parents, even though she wasn’t listed on the policy.

When alive, if John wanted to name his parents sole beneficiaries and not have Jane be a beneficiary, Jane would have had to sign a consent form waiving her rights to the death benefit.

This example is not always 100% the case, and permanent life insurance policies can be more complex than term, so it’s important to work with a professional who is knowledgeable about community-property laws. Start planning now by getting an instant and anonymous term life insurance quote. It takes just 30 seconds, plus Quotacy does not require any contact information until you are ready to apply.

Watch the Community-Property and Life Insurance Video

16 Comments

  1. Pey

    My brother passed away and left an insurance policy with our mother as the beneficiary. She passed also. Who’s entitled to the benefits, the siblings or my brothers husband.?We do live in a community property state?

    Reply
    • Natasha Cornelius

      Hi Pey, I’m sorry to hear about the death of your brother and mother. I’m going to make the assumption that your mother passed away prior to your brother, and not that your mother died afterwards.

      Because your brother lived in a community-property state, depending on your state’s specific laws, when the policy was purchased (prior to or after marriage), and if premiums were paid using income earned during his marriage, your brother’s husband may be entitled to at least 50% of the death benefit.

      If there are no contingent beneficiaries listed on the policy, the death benefit will be paid to your brother’s estate and the court will determine who gets what. If your brother died without a valid will in place, intestacy laws will likely mean that the court determines the estate goes to your brother’s husband, if they have no surviving children.

      Reply
  2. Jeff Kearl

    My father recently passed and is the owner of an insurance policy which my sister is the insured and my mother (surviving spouse) is the beneficiary. We live in a common law state and the policy in questions is a whole-life paid up policy (asset). This is an ownership question. Would not my mother become the owner of this policy due to the passing of her spouse?

    Reply
    • Natasha Cornelius

      Jeff, I’m sorry to hear about the recent passing of your father. In regards to your ownership question, some policies already state who is to become the owner if the original owner predeceases the insured. If the policy does not list a successor owner, then your father’s Will would determine who inherits assets, which would include the life insurance policy. If he didn’t have a Will, the probate court would determine ownership.

      Reply
  3. Ella Stevenson

    My friend signed & faxed beneficiary change form in Dec 2019, making me the new beneficiary of a life insurance policy. Somehow it wasn’t received by them & had to be resent, which was done Aug 2020. TransAmerica refused to accept the change, saying it was too old &!he would need to sign a new change form. Is there a limitation on the amount of time that passes when a change is signed & submitted? Well he died before the new form arrived in the mail. Do I still hv a beneficiary right

    Reply
    • Natasha Cornelius

      Ella, I’m sorry about the loss of your friend. To quick explain about the form being too old, this is similar to how a check is only valid if it’s cashed within a certain amount of time. With life insurance forms, these too have an expiration period.

      The rest of your situation is a complex one. In your case, Transamerica has likely already paid out the death benefit to the original beneficiary. So now I advise that you gather all the documentation you have about this policy, including a copy of the signed beneficiary change form, and find an insurance claims attorney in your state. They can advise you further on your options for getting all or a portion of the death benefit from the original beneficiary.

      Reply
  4. Chris Marino

    If my husband takes a loan against the whole life policy he bought during our marriage, do I have to sign something indicating that I’m aware of and consent to the loan being taken out? California residency. Thank you!

    Reply
    • Natasha Cornelius

      Chris, even in a community-property state it’s typically not a rule that a spouse would need to sign off on a life insurance policy loan. However, each community-property state has different laws so it’s best practice to double-check your state’s specific laws.

      Reply
  5. Victoria

    Hi,

    I live in Arizona and my husband passed away. He named his children the beneficiaries on the term life policy. Am I legally entitled to 50% and what do I have to do to get it?

    Thank you!

    Reply
    • Natasha Cornelius

      Victoria,

      I’m sorry to hear that your husband recently passed away. If he used joint funds to pay the premiums of the term life insurance policy, and you did not sign a waiver giving up your rights to the proceeds, then you are entitled to a portion of the death benefit. (If it was a permanent life insurance policy and your husband purchased it prior to the two of you getting married, then you are entitled to a portion of the death benefit determined by the amount of premiums paid prior to the marriage versus the amount paid in premiums during the marriage.)

      Contact the insurance company and put forth your community property right for the portion of the policy. They will likely want a copy of the marriage license to verify your rights to a portion of the proceeds. If they’re resistant, then I recommend getting an attorney involved. The attorney helping you with the probate process is a good start.

      Reply
  6. Nikki

    My husband and I live in a community property state and are getting divorced. I have a life insurance policy on him through my employer, which I have been paying for…can I continue paying on that policy once the divorce is final since I’m the policy holder? What if he remarries, would his spouse be entitled to half of it if he were to pass away?

    Reply
    • Natasha Cornelius

      Nikki,

      Since you are the owner and pay the premiums, your husband does not have a say. And if he re-marries his future spouse would not be entitled to any proceeds. If your husband owned the policy and you were the beneficiary, this is a situation in which his future spouse would have a right to the death benefit proceeds.

      During the divorce proceedings, however, the court may instruct you to transfer ownership to your husband. As your situation stands currently though, you can continue to pay the premiums and keep the policy active.

      Reply
  7. Eileen

    My husband was terminated from his job. I live in a community property state. Is the life insurance company or employer obligated to tell me that the policy was terminated? He passed away 3 months later.

    Reply
    • Natasha Cornelius

      Eileen, I don’t believe there is any legal obligation for an employer or life insurance company to notify the spouse if the employee/insured no longer has group life insurance coverage—regardless of community-property laws. However, as a general rule, most group life insurance policies allow a terminating employee to choose to convert their group policy into an individual plan. This option would have been given to the employee if available.

      Reply
  8. Patricia Reed-Lewis

    I live in a community property state. My spouse started a policy 3 years ago. We’ve been married for 9. He recently passed and left 100% of the life insurance to his mother. We have 3 children together, I really need help!

    Reply
    • Natasha Cornelius

      Patricia, from what you’ve stated you are entitled to 50% of the death benefit unless you signed a waiver regarding the policy as community-property. First try contacting the life insurance company to put forward your claim for half of the proceeds. If the company is unwilling to do so, consider contacting an attorney.

      Reply

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