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Life Insurance Beneficiary Laws in California

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					              GNWAM06-13
               May 12, 2006
                              Community Property Laws and Life Insurance
                              Ownership
                              Many people overlook the impact community property laws can have on
                              estate planning. This is true of life insurance.
                              Community Property Laws and Life Insurance. Community property issues are
                              typically governed by state law. Only certain states are “community property states”;
                              these include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas,
                              Washington, and Wisconsin. While this bulletin sets forth principles and scenarios that you
                              may find helpful, please be aware that states treat community property differently in the
                              life insurance context, and that clients needing guidance on these issues will likely need
                              legal advice as well as the advice of an insurance sales professional. Note that this
                              bulletin does not address ERISA or state or federal tax issues involving community
                              property.

                              There are several different ways in which community property states classify interests in
                              life insurance policies. Some states, including California, Nevada, and Washington, use a
                              concept called the "premium tracing" rule for policies carrying cash value. Under this rule,
                              each spouse is deemed to own his or her share of a policy proportionate to the share of
                              premium contributed. If all premium was paid from community funds, then each spouse
                              owns a one-half interest. The result is that, if community property funds were used to pay
                              premiums, then at the death of an insured spouse, only one-half of the death benefit
          Genworth Life &
 Annuity, Genworth Life,
                              proceeds are included in his or her gross estate, regardless of who the owner has
   and First Colony Life      designated as beneficiary. Also, the deceased spouse’s estate will generally include one-
     are members of the
 Insurance Marketplace        half of the policy value (not death benefit) of any policy owned by the surviving spouse on
  Standards Association       a life other than that of the deceased.
   (IMSA). Membership
promotes ethical market
   conduct for individual     Other states, including Texas, have adopted the “inception of title” rule, under which the
       life insurance and
     annuity companies.       character of the property is fixed at the time of its inception or acquisition. Under this rule,
                              the proceeds of a life insurance policy issued to the insured before marriage naming his
                              estate as beneficiary belong entirely to his separate estate. The insured’s spouse would
                              have a right of reimbursement based on the amount of premiums paid from community
                              funds during the marriage, but no right to proceeds. If the policy is purchased during the




             306B8970 0306                                                                                    Page 1 of 3
marriage and paid for with community funds, the proceeds will be considered community
property.

The inception of title rule in Texas applies to both term life insurance and cash value
policies. Note, however, that in some states different rules are applied to term policies
than to cash value policies. In California, if the last premium paid before death on a term
policy was paid from separate funds of the policyowner, then the policyowner’s spouse will
not have a claim to any portion of the proceeds unless that spouse is a named
beneficiary.

Ownership Confusion. When a couple moves from a non-community property state to a
community property state, they may overlook the community property issues affecting
their life insurance. Once they move, if they use community property funds to pay
premiums on existing policies, these policies may become “hybrids” – part community
property and part non-community property. New life insurance policies the couple
acquires after moving could be community property, hybrid property, or separate property
of one spouse (the latter if separate funds were used to make all premium payments).

The complexity of this issue, and the need for expert advice, is demonstrated by the
situation in California. There, property acquired in a non-community property state, if it
would be considered community property in California, will likely be considered what is
called “quasi-community property” after the move to California. This type of property is
treated as community property in California for the purposes of both divorce and
inheritance. Obviously, it is important to check into the law of the particular state involved
when considering the form of ownership of a life insurance policy.


BENEFICIARY ISSUES.
Community property issues need to be kept in mind when naming beneficiaries on a life
insurance policy. In a community property state, if an individual wishes to name a
beneficiary other than his or her spouse as beneficiary, it is advisable to have the spouse
sign the policy change form to indicate consent. In some states, it is presumed that a
spouse has consented if the named beneficiary is a close relative, but the safest course is
to have the spouse sign in order to avoid disputes and delay when there is a claim on the
policy. This is true because, as noted above, if the spouse did not consent to the change
he or she may have a claim to a portion of the proceeds.


WAYS YOU CAN HELP:
Careful review of a married couple’s life insurance policies is critically important where a
couple has moved between community and non-community property states, bringing
existing policies with them. Gather their existing policy information, and determine where
each policy was purchased and the source of the funds for the premiums. Also, be sure
to take note of any life insurance policies insuring the couple’s lives but which are owned
by third parties, such as trusts or businesses.

If they haven’t done so already, strongly advise your clients to meet with an attorney to
review and update their wills and other estate planning documents as needed. Any
changes or additions to their existing life insurance coverage will need to be coordinated
with their estate plan, and that will need to reflect the community property and other laws
of their new state. An attorney with expertise in community property will be able to assist
in determining the ownership status of the existing policies. Since you are the life




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insurance expert, make yourself available as a key resource to the attorney during the
process.

Help to determine and possibly simplify policy ownership. For example: A couple moves
from New York to a community property state. They each own a life insurance policy on
their own life. If they make premium payments after the move using community property
funds, this may cause their policies to become “hybrids”. This can make things difficult to
keep track of from an estate planning standpoint, as each time a premium payment is
made the amount of death benefit to be included in the estate of the first to die may
change. A better idea may be to use non-community property funds to make premium
payments on policies owned prior to the move, and use purely community property funds
to purchase new policies. Note that as explained above, this strategy will not be effective
in all states, so legal consultation may be needed.


DISCLAIMER
The Genworth Financial companies wrote this content to help you understand the ideas
discussed. Any examples are hypothetical and are used only to help you understand the
ideas. They may not reflect your client(s)' particular circumstances. Your clients should
carefully read their contract, policy, and prospectus(es), when applicable. What we say
about legal or tax matters is our understanding of current law; but we are not offering legal
or tax advice. Tax laws and IRS administrative positions may change. We did not write
this material for use by any taxpayer to avoid any Internal Revenue Service penalty. Your
clients should ask their independent tax and legal advisers for advice based on their
particular circumstances.

If this material states or implies that it was prepared or distributed to promote, market or
recommend an investment plan or arrangement within the meaning of IRS guidance, or
such use may be reasonably expected, then, as required by the IRS, the following also
applies:

The tax information in this material was written to support the promotion or marketing of
the transaction(s) or matter(s) addressed in this material.




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