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How does living in a community-property state affect my life insurance?

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 percent 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 percent 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.


Wikipedia – Community Property

NOLO – Separate and Community Property During Marriage: Who Owns What?

NOLO – Naming a Beneficiary for Your Life Insurance Policy

Watch the Community-Property and Life Insurance Video

Video Transcript

Coming to you live from sunny Hollywood, California!

[Editor’s note: Not really.]

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance agency where you can get life insurance on your terms.

I’m Jeanna and I’m Natasha.

Today’s question is:
How does living in a community-property state affect life insurance?

But first, Natasha, can you tell our viewers what a community-property state is?

I can. A community-property state follows the law that all assets acquired during marriage are legally owned 50/50. As of today there are nine community-property states: Arizona Idaho, Louisiana Nevada, New Mexico Texas, Wisconsin Washington and California.

Community-Property States*

Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Wisconsin, Washington, and California

*As of June 29, 2018

So, for example, if John and Jane Smith are living in California, and are married, and John goes out and buys a fancy new Corvette, Jane legally also owns that Corvette.

Right, but it’s important to note that all community-property states may have slightly varying laws. There is not one uniform community property system.

Good to know.

So, going back to today’s question, how does living in a community-property state affect life insurance?

Well, it mainly affects the death benefit. So, let’s say you and your husband Chad live in California and Chad buys a life insurance policy on himself and names his mother the sole beneficiary. You actually legally are entitled to 50% of that death benefit. And if Chad wants his mother to receive 100% of the death benefit, he will need you to sign a consent form waiving your rights to the benefit.

Okay, so we have a question from one of our blog readers. She lives in Washington with her husband, which is a community-property state, and she is wondering if she’s entitled to 50% of the death benefit of the policy on her husband that his sister owns.

No. A policy owned by a sibling does not fall under community property law. That policy owned by the sister is also paid for with her money. This is completely separate from the shared assets of the husband and wife. But if he purchased the policy himself and made his sister the beneficiary, then the wife would be entitled to the benefit.

Right. And just as another reminder to our viewers, community-property states do not all follow the exact same laws and permanent life insurance is more complex than term. So, if you live in a community-property state be sure to work with a professional who is familiar with community-property law.

We have those professionals here at Quotacy.

We do.

If you have any questions about life insurance leave us a comment. Otherwise tune in next week when we discuss how to find out if your deceased loved one had a life insurance policy. Bye!

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius, CLU

Senior Editor and Life Insurance Expert

Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.