Revocation of Life Insurance Beneficiary on Divorce

Take-Away: Today the U.S. Supreme Court held that state statutes that automatically and retroactively revoke life insurance beneficiary designations of an ex- spouse after a divorce are constitutional. The decision in Sveen v. Melin  was 8 to 1.  The Court found that these state statutes do not violate the Contracts Clause of the U.S. Constitution. Rather than substantially impairing a life insurance contract, these state statutes were found to support the insured probable intent. These state statutes impose default rules to construe life insurance policies, and this default rule by statute can easily be defeated with the insured simply re-designating his/her former spouse as the policy’s beneficiary.

Background: The effect of a divorce on estate planning documents and other governing instruments (e.g. beneficiary designations) is described in the Estates and Protected Individuals Code. MCL 700.2807 is the key provision on this question:

• Except as provided by the express terms of a governing instrument, court order, or contract relating to the division of the marital estate made between the divorced individuals before or after the marriage, divorce, or annulment, the divorce or annulment of a marriage does all of the following: (a) Revokes all of the following that are revocable: (i) A disposition or appointment of property made by a divorced individual to his or her former spouse in a governing instrument and a disposition or appointment created by law or in a governing instrument to a relative of the divorce individual’s former spouse. 
• Each provision of a governing instrument is given effect as if the former spouse and relatives of the former spouse disclaimed all provisions revoked by this section or, for a revoked nomination in a fiduciary or representative capacity, as if the former spouse and relatives of the former spouse died immediately before the divorce or annulment.

The term governing instrument is broadly defined in EPIC to include a deed, will, trust, funeral representative designation, insurance or annuity policy, or an account with a POD or TOD registered beneficiary form. [MCL 700.1104(m).]

This Supreme Court decision differs from an earlier decision 17 years ago on the same topic of automatic revocations in beneficiary designations in the event of a divorce.  In Egelhoff v. Egelhoff, 532 U.S. 141 (2001) the Court ruled that ERISA pre-empted state statutes that severed by operation of law a former spouse’s interest in life insurance and retirement benefits provided under qualified ERISA plans. If the employee-participant did not formally change the ERISA beneficiary designation away from their former spouse after the divorce, i.e. an affirmative act was required,  then the plan account balance, or the life insurance death benefit that is provided for under the ERISA governed plan, will be distributed pursuant to the plan documents, i.e. to the former spouse named as the last-named beneficiary, or to default beneficiaries who are described in the plan documents.

Consequently, the Sveen death benefit is not governed by ERISA but is covered by conventional contract principles associated with a life insurance policy, which is why the Contracts Clause of the U.S. Constitution was implicated in the Court’s decision.