It is not uncommon for individuals to purchase a life insurance policy, and then forget about it. People tend to assume that once it is initially purchased, nothing else ever has to be done with it. Well, just as it is important to regularly review the remainder of your estate plan, you should regularly review your life insurance plan(s) to ensure that your named beneficiaries are still appropriate for your current situation. Your policies should be reviewed every few years, or upon the happening of any major life event (marriage, divorce, birth of a child, death in the family, etc.).
It’s been a busy season for the Supreme Court, and with the recent decisions regarding DOMA and Prop 8, other decisions have been overshadowed. This is not to say they are any less important. One such decision, Hillman v. Maretta, deals with federally governed life insurance plans. Federal plans are governed by a specific set of federal rules and regulations. For example, the Federal Employees Group Life Insurance Act of 1954 (FEGLI), at issue in Hillman, prioritizes payment to named beneficiaries of the policy. This seems fairly straightforward, but can become quite complicated when a policy holder divorces and remarries, and fails to update the named beneficiary of the policy to their current spouse. Federal law dictates that the ex-spouse would be entitled to the benefits of the policy.
Many states have statutes that revoke the beneficiary designation in any contract that provides a death benefit to an ex-spouse if the policy holder did not change the beneficiary. The Virginia statute at issue in Hillman also included a provision that provided a cause of action against the ex-spouse to recover any benefits paid to them under such a contract.
In the Hillman case, Warren Hillman owned a FEGLI policy that named his ex-wife, Judy Maretta, as the beneficiary. Hillman remarried Jacqueline Hillman, but did not update the beneficiary on his policy. At his death, the proceeds of the policy were paid to Judy Maretta. Jacqueline Hillman then sued Judy Maretta under the Virginia statute to collect the proceeds of the policy.
The case wound its way through the court system, finally landing on the docket of the U.S. Supreme Court. The Court held that the action to collect the proceeds was preempted by FEGLI because the Virginia statute implied someone other than the named beneficiary had a right to the plan benefits. Because the state law was in direct conflict with the federal law, the state law must fail.
Although Hillman applies only to FEGLI and federally authorized plans (i.e. 401(k) plans), the Court’s ruling definitely highlights the need to update ALL components of your estate plan upon the happening of a major life event, not just your will.