Estate Planning for Your Family After a Divorce – Can a State Divorce Decree Override Federal Life Insurance Rules?
When a married couple gets divorced, typically, the state court divorce decree requires one spouse to maintain life insurance coverage for the other spouse or their child. The question becomes whether this state court divorce decree controls life insurance policies governed by federal law.
There are several different forms of life insurance policies, and whether a divorce order applies depends on the type of policy. Some typical life insurance policies include:
ERISA-governed life insurance policies, policies provided by an employer as part of a benefits package;
Servicemembers’ Group Life Insurance (SGLIA), policies issued to service men and women; and
Veterans Group Life Insurance (VGLI), policies issued to former service men and women after they leave the military.
ERISA, SGLIA, and VGLI policies are governed by federal law. Conversely, independent life insurance policies, those policies purchased directly through the insurance company, are in large part, regulated by state law, and will be controlled by a state court divorce decree.
ERISA Policies
ERISA ordinarily requires life insurance benefits to be awarded to the beneficiary listed in the plan documents. With limited exceptions, federal law preempts state laws that conflict with ERISA.
However, in 1984, Congress amended ERISA to carve out an exception for “qualified domestic relations orders” (“QDROs”). As a result, ERISA’s preemption clause does not apply to qualified domestic relations orders.
A domestic relations order (DRO) covers child support, alimony, or property rights for a spouse, former spouse, or child. A DRO becomes a QDRO if it gives an alternate payee (like a child or former spouse) the right to receive some or all of the plan benefits and includes specific details such as names, addresses, the amount or percentage to be paid, the period it applies to, and the plans it covers.
Therefore, if a state divorce decree meets the limited exception provided in ERISA, it may control the award of life insurance proceeds upon the death of the plan participant.
SGLI and VGLI Policies
The U.S. Supreme Court case Ridgway v. Ridgway (1981) showed how federal law applies to military life insurance. In that case, a divorce order required the husband to keep life insurance for his children. After remarrying, he changed the beneficiary on his Servicemembers’ Group Life Insurance (SGLI) policy to his new wife. When he died, both his ex-wife (on behalf of the children) and his new wife claimed the benefits. The Court ruled that the federal law governing SGLI overrides state divorce orders.
This rule also applies to Veterans Group Life Insurance (VGLI), which service members can convert to after leaving the military. Federal law gives service members the absolute right to choose and change their beneficiaries at any time, and state court orders cannot take away that right. Courts also cannot impose remedies like constructive trusts that would interfere with this federal protection.
Final Thoughts
This is not a complete review of all life insurance policies governed by federal law or all possible legal remedies. The key takeaway is that the rules depend on the type of policy. Federal policies like ERISA, SGLI, and VGLI follow federal law first, while private insurance usually follows state law.
ShuffieldLowman does not handle dissolution of marriage cases. However, if you are navigating divorce and life insurance issues, an attorney can help you understand which rules apply and make sure your estate planning protects your family.