In State Farm Insurance Company v. Avila, et al, Judge Pratt of the federal Southern District of Iowa considered the effect of a divorce on a life insurance beneficiary designation. The dispute was between the minor children of a prior marriage and the child of a later marriage.
The insured purchased a life insurance policy through State Farm while he was married. They later divorced. The divorce decree with his ex wife specified that he would maintain their children as irrevocable beneficiaries of the policy. However, the insured later changed the designation, in favor of a daughter from a later marriage.
The children of the earlier marriage challenged the later beneficiary designation. In analyzing the dispute, the federal court applied Iowa law. Iowa law provides that a designated beneficiary of a life insurance policy has no vested interest in the insurance policy. In other words, “the insured has complete control and domination of the policy” and may freely change beneficiaries. Therefore, an insured typically is free to change a designation and the prior designee has no claim to prevent a change.
But the federal court also noted another proposition of Iowa law is that when a beneficiary is named pursuant to contract, the insured loses power to designate different beneficiaries. Iowa precedent had established that this proposition applies to divorce dissolution decrees:
In this case, the insured had taken out a policy before the divorce. The divorce decree required him to name his children as irrevocable beneficiaries of “the Life Insurance policies currently insuring [his] own life.” Because of this provision, he was not able to change the named beneficiaries after the decree was entered.
The daughter of the later marriage argued that equity favored her position. She noted that the children of the prior marriage had already collected on a second policy. She contended that the intent was clearly for the children of the prior marriage to receive that second policy, while she received the proceeds of the disputed policy. But the court rejected that argument:
I see a lot of beneficiary disputes involving divorce decrees or settlements. The outcome of these cases is dependent upon the law of the particular state and the particular wording of the decree. It is very important to consult a lawyer experienced in evaluating life insurance interpleader disputes.