How Community Property Laws Can Affect Life Insurance Payouts
In community property states, a spouse may be legally entitled to part of a life insurance payout—even if they are not the named beneficiary. This is because life insurance acquired or paid for during the marriage may be considered marital property. Knowing how these rules work is critical if you're facing a denied or disputed claim.
Life insurance policy ownership can become legally complicated when a marriage ends in death or divorce. In states with community property laws, a surviving spouse may have a legal right to a portion of the policy’s death benefit—even if someone else is listed as the beneficiary. We recently resolved a $300,000 dispute with Midland National Life Insurance Company involving community property law, securing a favorable outcome for our client. This issue arises more often than people realize, especially when beneficiaries are changed without spousal knowledge or consent. To understand why insurers may delay or deny payouts in these cases, it helps to grasp the basics of how community property applies to life insurance.
What Is Community Property in the Context of Life Insurance?
Community property refers to assets and income acquired during the course of a marriage. In community property states, each spouse owns 50% of all marital assets—regardless of whose name appears on the title or who earned the money. This rule applies broadly, including to real estate, vehicles, retirement accounts, and yes—even life insurance policies. For example, if a husband buys a life insurance policy during marriage and pays the premiums using shared income, the policy may be considered jointly owned—even if the wife is not named as a beneficiary. If the husband dies and leaves the payout to someone else, the wife may still be entitled to half of the proceeds because of her marital interest in the policy.
Which States Recognize Community Property Rules?
There are nine true community property states in the U.S.: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Additionally, Alaska allows couples to opt in to community property treatment via a written agreement. In these jurisdictions, courts generally divide marital property equally during divorce, and the same principle often applies when determining life insurance payout rights after a spouse dies. If you live in one of these states, community property laws may override or at least complicate the standard beneficiary designation process.
How Life Insurance Type Influences Community Property Rights
Whether a life insurance payout is subject to community property division often depends on the type of policy involved and when the premiums were paid. Let’s break it down by category:
Term Life Insurance: In most cases, term life policies are treated as fully community property if the premiums were paid using marital funds. That means the surviving spouse is entitled to 50% of the policy’s death benefit, even if someone else is listed as the sole beneficiary. This can result in contested claims, delayed payouts, and litigation if the insurer is unsure how to distribute the funds. In these situations, life insurance companies may place the benefit in escrow or delay payment until a legal resolution is reached.
Permanent Life Insurance (Whole, Universal, Variable): Permanent life insurance has a cash value component, which complicates ownership. In these cases, community property rights may only apply to the portion of the policy that was paid during the marriage. If the insured purchased the policy before getting married and continued paying premiums after marriage using shared income, the payout may be prorated. For instance, if the insured paid two years of premiums before marriage and one year after, and then died, only one-third of the policy would be considered community property. The surviving spouse would typically be entitled to half of that portion—in this case, 16.6% of the total payout. The remaining benefit would go to the named beneficiary.
Examples of How Community Property Impacts Beneficiaries
Here’s a common scenario: Partner A purchases a $500,000 life insurance policy and names their sibling as the beneficiary. After marrying Partner B in a community property state, they continue paying the premiums using marital income for several years. When Partner A dies, the insurer receives a claim from the sibling. However, under community property law, Partner B may assert a right to 50% of the payout. If successful, the sibling’s share could be reduced to $250,000—even though they were the named beneficiary. Disputes like these are common, and insurers often wait for legal clarification before disbursing any funds.
Why Insurers Delay or Deny Community Property Claims
Insurers are often caught in the middle when a beneficiary files a claim and a surviving spouse disputes it. In community property states, the law may require the insurer to recognize the spouse’s rights—even if that spouse was not listed on the policy. To avoid legal exposure, insurance companies may delay paying out benefits until a court determines how the funds should be divided. In some cases, if the insurer pays the named beneficiary and ignores a valid spousal claim, they can be sued for wrongful payment. To protect themselves, insurers will often require both parties to agree—or will wait for a court ruling—before issuing the funds. This results in frustrating delays for all involved.
Protecting Your Rights in a Community Property Life Insurance Dispute
If you’re a surviving spouse who believes you were wrongfully excluded from a life insurance payout—or if you're a named beneficiary whose claim has been delayed due to a spousal dispute—you need legal guidance immediately. These cases often require a careful analysis of state law, the policy’s purchase history, the type of life insurance, and how premiums were paid. Our firm has extensive experience litigating these types of disputes and recently recovered $300,000 in a community property case against Midland National. We can help you assert your rightful claim and fight for the share you’re owed under the law.
Don’t Let Legal Complexity Cost You the Benefits You Deserve
Community property rules are designed to ensure fairness in marriage, but they often create confusion when it comes to life insurance. Insurers may delay payments, split proceeds incorrectly, or deny claims altogether when community property issues arise. Don’t let an insurance company or an uninformed claim representative decide your fate. If you're involved in a life insurance dispute in a community property state, contact us now. Our experienced attorneys will help you understand your legal position and fight for your rightful share.