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Community Property • Life Insurance
CPROP#046
Legal Definition
Where life insurance is a whole life insurance policy, the proration rule will determine the characterization of the policy. Where it is a term life insurance policy, the last premium payment determines the character (e.g., if the last payment was made using community funds, it is 100% community property).
Plain English Explanation
If a life insurance policy is a whole life policy, the amount that is community property versus separate property is determined by a formula based on premium payments made with community funds versus separate funds. If it is a term life insurance policy, then the full amount is characterized based on the funds used to pay the most recent premium before death.
In other words, life insurance policies create complexities because premiums are paid over many years, possibly with a mix of separate and community funds. For whole life policies, where cash value builds up in addition to the death benefit, the community gains a share of growth in proportion to their share of premiums. For term policies, which only pay out if death occurs during the term, the character is essentially a reimbursement for the most recent premium payment that maintained the policy until death. Without guidance like this, spouses could unfairly lose benefits they paid for.
In other words, life insurance policies create complexities because premiums are paid over many years, possibly with a mix of separate and community funds. For whole life policies, where cash value builds up in addition to the death benefit, the community gains a share of growth in proportion to their share of premiums. For term policies, which only pay out if death occurs during the term, the character is essentially a reimbursement for the most recent premium payment that maintained the policy until death. Without guidance like this, spouses could unfairly lose benefits they paid for.
Hypothetical
Hypo 1: Bob purchases a whole life insurance policy before marrying Amy and continues to pay for it using his salary after they get married. Result: The value of the policy is divided according to the proration rule. Payments made before the marriage are Bob's separate property, while payments made after the marriage using his salary, which is community property, contribute to the policy being partly community property.
Hypo 2: Amy buys a term life insurance policy and pays the premiums using her personal savings. The last payment, however, is made from a joint account she shares with Bob. Result: Since the last premium was paid using community funds, the entire term life insurance policy is considered 100% community property.
Hypo 2: Amy buys a term life insurance policy and pays the premiums using her personal savings. The last payment, however, is made from a joint account she shares with Bob. Result: Since the last premium was paid using community funds, the entire term life insurance policy is considered 100% community property.
