Supreme Court Weighs In On Life Insurance Beneficiaries

Supreme Court Weighs In On Life Insurance Beneficiaries

By TLB Contributing Writer: Stuart

One of the basic rights in our country is the right to enter into contracts. Without the ability to bind others to an agreement, businesses and consumers would have very little ability to engage in meaningful commerce.

Recognizing this, the drafters of the U.S. Constitution specifically included a clause that limits a state’s ability to interfere with the ability to form and enforce contracts. The Contracts Clause helps make business possible for consumer and corporation alike.

Working Around the Contracts Clause

However, a state may pass laws that retroactively impact the ability to contract in certain circumstances. One such circumstance is the ability to retroactively touch upon contracts directing the payment of life insurance proceeds.

In the recent decision Sveen v. Melin, the Supreme Court upheld a Minnesota law that automatically revoked the payment of life insurance proceeds to an ex-spouse where the divorce occurred after the life insurance policy was created. The law, intended to protect secondary beneficiaries in cases where a divorcing couple forgot to amend their policies, was challenged on the basis that it (allegedly) interfered with an individual’s right to contract.

In upholding the law, the Supreme Court noted that the effect of the legislation was not to alter the individual’s right to enter into a contract. Rather, the only outcome was to direct the benefit flowing from such a contract. Further, because a person who did wish to direct the benefits of a given policy to his or her ex-spouse could easily do so simply by filing a form to change the beneficiary, the obligation imposed upon the contracting party was minimal.

How the Court Arrived at Its Conclusion

A full exploration of the reasoning of the Court is beyond the scope of this article. Supreme Court decisions are necessarily circuitous and verbose; however, generally speaking, the Court will first determine whether there is a clear violation of the Constitution in a case such as this before going on to explore public policy issues and ramifications.

In this case, the Court decided that, because the Minnesota law did not infringe upon an individual’s right to enter into a contract, it did not run afoul of the Constitution. Touching upon the second question, the public policy issue is one of balancing benefits versus harms.

The law, as written, seeks to avoid the not infrequent situation where a party takes out an insurance policy and then later gets divorced. Amid the chaos of a disintegrating marriage, the insured frequently forgets to change his or her policy. Prior to the passage of the law, the harm suffered was that life insurance proceeds would go to someone that the insured (quite likely) no longer intended to gain the benefit of the policy.

The Court determined that, in the infrequent case where someone does wish for proceeds to go to his or her ex, the inconvenience necessitated—filling out a change of beneficiary form—was minimal compared to the inconvenience that the law eliminated.

How This Affects You

If you live in Minnesota or a state with a similar law to the one at issue in this case, the impact is overwhelmingly positive.

Josh Henry of Final Expense explains,

“You no longer have to worry about what happens if you forget to change your policy during a divorce.”

If you do wish for the proceeds of your policy to go to your ex, simply make it a point to complete the appropriate paperwork after the divorce has been concluded. As always, you should consult an estate planning attorney to be sure that your wishes will be followed upon the event of your death.


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