Commentary on HB 457

1999 Legislation:

Commentary on HB 457 -- Reversing the Divorce Rule
on Life Insurance/Retirement Proceeds

HB 457 (by Rep. McClendon) would reverse the current Texas rule regarding what happens to the proceeds of life insurance policies and various retirement plans in cases where a marriage ends in divorce or annulment after one spouse names the other as the beneficiary. Current law (in Family Code Sections 9.301 and 9.302) provides that beneficiary designations in favor of divorced spouses are "not effective" unless the divorce or annulment decree states otherwise, the ex-spouse is redesignated as beneficiary after the divorce or the ex-spouse is designated to receive the proceeds in trust for children. Rep. McClendon's bill would make designations in favor of ex-spouses effective unless the decree states otherwise.

Note that, under both current law and HB 457, the language in the divorce or annulment decree controls. Thus, in cases where the spouses properly consider and deal with the insurance or retirement proceeds as a marital asset in the divorce, they and/or the court may handle the proceeds any way they and/or it wishes. What current law does (and what HB 457 would do, except in reverse) is provide the default rule for what happens when the divorce decree does not address the insurance and/or retirement proceeds.

While I do not know the impetus for HB 457, I assume that it will be supported by the life insurance industry lobbyists. The insurance industry backed HB 2910 in 1997. HB 2910, authored by Rep. Delisi), would have made the same change to Family Code Section 9.301 (regarding life insurance) as this session's HB 457 would, but HB 457 would go further to reverse the rule as to retirement plan proceeds (Family Code Section 9.302) as weill. In 1997, HB 2910 was favorably reported by the House Juvenile Justice and Family Issues Committee but died in the House Calendars Committee.

I believe that the insurance folks will back HB 457 because they see the ex-spouse as a possible source of continued insurance business. Here's the rationale: If husband and wife bought the policy on husband's life during the marriage and the husband later dies after the divorce without changing the beneficiary designation, there's a decent chance the insurance agent still has a connection with the ex-wife and, therefore, is more likely to be involved in further business if the ex-wife gets it than if the husband's estate gets it. Another reason that the insurance industry may wish to see HB 457 pass is that it makes it less likely that the insurance company will erroneously pay the wrong party -- if the rule is reversed, companies can pay the person named in the policy without worrying about the possibility of a divorce. (Of course, a death certificate states the decedent's marital status and the name of the surviving spouse, if any, and it's not too much to ask the insurance company to read the death certificate.)

Notwithstanding the wishes of the insurance industry, HB 457 would be bad law for several reasons.

1. It is illogical. While we all hope that the decision about who gets insurance in or after a divorce is a conscious one (and, therefore, addressed in the decree or by the insured after the divorce by changing the beneficiary designation), the sad fact is that there will be times when this does not happen. Probably in most cases this will result with group term life insurance at a spouse's place of employment -- the need for continuing premium payments will probably cause non-group policies either to be addressed in the decree or changed after divorce. If a policy does slip through unchanged -- especially a group policy -- it is a safe bet that the insured would rather see the money go to his children or other estate beneficiaries rather than his or her ex-spouse. Default rules such as this should yield the most logical and likely result.

2. It is counter most other statutory default rules. With the changes made in 1997, Texas law finally is getting to where there is near unanimity in the default rules about divorces and estate/probate issues:

Issue	Statute	Default Rule
Wills	Tex. Prob. Code Sec. 69	Former spouse treated as predeceasing
Property Power of Attorney	Tex. Prob. Code Sec. 485A	Powers of former spouse as agent terminate, but third parties protected
Health Care Power of Attorney	Civ. Prac. & Rem. Code Sec. 135.005	Power is revoked if former spouse is agent
Declaration of Guardian	Tex. Prob. Code Sec. 679	Designation of spouse has no effect upon divorce
Directive to Physicians	Health & Safety Code Ch. 6762	Statute silent on effect of divorce
Life Insurance	Fam. Code Sec. 9.301	Designation of Ex-Spouse Not Effective
Retirement Plans	Fam. Code Sec. 9.302	Designation of Ex- Spouse Not Effective

Thus, it is only the law regarding Directives to Physicians that is not in line with the general default rule that designation of a spouse to receive benefits or serve in a fiduciary capacity prior to divorce is ineffective after divorce. (It is understandable that the Directive to Physicians statute does not address the effect of divorce since the standard form does not include a place for designating an agent to make treatment decisions; rather, the statute merely makes designation of an agent permissive. Nonetheless, this statute, too, should be brought in line with the others.) The people of Texas benefit if all of the default rules break the same way. That way, there's some predictibility and certainty.

3. It may preclude ex-spouses from changing beneficiaries. The bill arguably does more than reverse the rule -- it arguably does away with the right of the insured to change the beneficiary designation after divorce. As amended, Section 9.301 of the Family Code would read as follows (a similar change is proposed to Section 9.302, which governs retirement plans):

If a decree of divorce or annulment is rendered after an insured has designated the insured's spouse as a beneficiary under a life insurance policy in force at the time of rendition, a provision in the policy in favor of the insured's former spouse is valid unless the decree states otherwise.

Gone is the current law's exception for redesignation of the ex-spouse after divorce. Of course, if the rule is reversed, there is no reason to have an exception for redesignation of the ex-spouse after divorce. However, by taking away the exception and providing "unless the decree states otherwise" as the only exception to the default rule, an insured may not be empowered to change the beneficiary designation on an insurance policy after divorce if the policy was "in force at the time of rendition" unless the decree specifically authorizes the change. This is going WAY too far. Again, using group term as an example, if a former spouse remarries and designates spouse # 2 as the beneficiary on his or her group term policy at work, should the ex-spouse get the proceeds? Does it matter if the employer has changed insurers? Under HB 457, it apparently would, since the default rule only applies to policies "in force at the time of rendition" -- thus, who gets the proceeds could depend on the quirky nature of employers' decisions regarding group term carriers.

For all these reasons, HB 457 should die a quick and certain death. Unfortunately, with the backing of the insurance industry, it may linger as a problem to be watched all session. [01/26/99]