Life insurance and Texas community property

Community property, in one paragraph

Under Family Code Sec. 3.002, community property is property, other than separate property, that either spouse acquires during marriage. Separate property (Sec. 3.001) is what a spouse owned before marriage or received during marriage by gift or inheritance. Sec. 3.003 presumes that property either spouse has during marriage is community property, and it takes clear and convincing evidence to prove otherwise.

For life insurance, that means a policy bought during the marriage and paid for with earnings is presumptively a community asset, even if only one spouse's name is on it. A policy owned before marriage starts out as separate property, though paying premiums from community funds afterward can raise questions you'd want a lawyer to sort out.

Owner, insured and beneficiary are different roles

Texas Insurance Code Chapter 1103 lets an adult apply for a policy on their own life and name, in writing, any person or entity as beneficiary, owner, or both. A third party can also buy a policy on your life with your written consent. The owner controls the policy: changing beneficiaries, borrowing against cash value, or surrendering it.

In a marriage, it helps to be deliberate about who is listed as owner. If one spouse owns a policy on the other's life, that owner's death or a divorce can leave the policy in an awkward position. Ask the insurer what happens to ownership if the owner dies first, and name a successor owner if the policy allows it.

Naming someone other than your spouse

You're allowed to name anyone as beneficiary. But when a policy is paid for with community funds, the other spouse may claim an interest in the proceeds. Texas Insurance Code Sec. 1103.102 generally requires the insurer to pay the designated beneficiary, except when it receives notice of an adverse claim from someone with a bona fide legal claim to the proceeds. In that case the insurer isn't required to pay the designated beneficiary, so payment can be held up while the claim is sorted out.

If you plan to name a child from a prior relationship, a parent, a trust, or anyone besides your spouse on a policy funded during the marriage, talk it through with your spouse and an attorney first. A written agreement can prevent a claim dispute that delays payment to the people you meant to protect.

Divorce automatically cancels an ex-spouse designation, with exceptions

Family Code Sec. 9.301 says that if you named your spouse as beneficiary and the marriage later ends in divorce or annulment, that designation is not effective unless one of three things is true:

• The divorce decree itself names the former spouse as beneficiary.
• You re-designate the former spouse as beneficiary after the decree.
• The former spouse is named to receive the proceeds in trust for, or for the benefit of, a child or dependent of either of you.

What happens to the money after a divorce

If the ex-spouse designation fails, Sec. 9.301 sends the proceeds to the named alternative (contingent) beneficiary, or to the insured's estate if there isn't one. Proceeds paid to an estate can take longer to reach your family and may be exposed to the estate's process.

The statute also protects insurers that pay the ex-spouse before anyone objects: the insurer is liable to the correct recipient only if it got written notice at its home office before paying and didn't interplead the money into court. The practical lesson is to update your beneficiary form right after a divorce rather than relying on the statute. Retirement accounts and other financial plans have a parallel rule in Sec. 9.302.

Naming a minor as beneficiary

An insurer generally can't hand a large check to a child. Texas offers a few paths, and choosing one in advance saves your family time:

• Name a custodian under the Texas Uniform Transfers to Minors Act. Property Code Sec. 141.004 lets you nominate a custodian in a beneficiary designation, using words such as "as custodian for (child's name) under the Texas Uniform Transfers to Minors Act."
• Without a nominated custodian, Sec. 141.008 lets the insurer transfer to an adult family member or a trust company as custodian only if the amount is $25,000 or less.
• Estates Code Chapter 1355 lets a debtor pay up to $250,000 owed to a minor without a guardian into the county clerk's registry, where a parent can withdraw it only after posting a court-approved bond.
• Larger amounts may require a court-appointed guardian of the estate, or you can name a trust as beneficiary, which an estate attorney can set up.

A checklist for married Texans

Use this before you buy, and again after any marriage, divorce, birth or adoption.

• Who is the owner of each policy, and is a successor owner named?
• Are primary and contingent beneficiaries named, with percentages that add up?
• If you named anyone other than your spouse on a community-funded policy, does your spouse know and agree in writing?
• After a divorce, did you file a new beneficiary form, and does the decree say anything about life insurance?
• For children, did you nominate a UTMA custodian or a trust instead of naming the child directly?
• Do you have the insurer's written confirmation of every change?