Establishing the value of a life insurance policy can be one of the more muddled issues to deal with when determining property division. Although there are several types of life insurance policies, not all forms give rise to property division issues.
Generally, there are two categories of life insurance you need to consider— whole life and term life. Whole life policies normally build cash value and continue coverage after premiums have been paid in full. On the other hand, term life insures the individual for an agreed upon period of time and then terminates.
In California, life insurance is considered community property. As a general rule, however, if a policy is purchased prior to marriage and is paid with separate funds, the policy remains separate property. In contrast, if a policy was purchased during the marriage and all premiums were paid with community funds, the policy is deemed part of the community. Issues can arise, however, when premiums have been paid with separate and community funds. In such instances, you may wish to consult with a Forensic Accountant.
Whole Life Policy Valuation Considerations
The value of a whole life policy needs to be determined before the finalization of the divorce settlement. In most instances, a whole life policy is valued at its cash surrender value at the time of valuation of property. The court will divide the worth of the policy between the divorcing spouses unless a different agreement had been reached by the parties prior to the settlement action.
Surrender Charges: Some whole life policies have a “surrender charge”. The amount of this fee usually diminishes with the age of the policy. For Family Law purposes, however, the value of the policy should not be lowered to reflect the surrender charge. This charge may never need to be paid per the terms of the policy, as the policy may remain in force long after dissolution. {See In Re Marriage of Drivon (1972) 28 CA3d 896 and In Re Marriage of Stratton (1975) 46 CA3d 173}.
Taxes: The value of a whole life policy should only be reduced due to potential taxes, if the tax is immediate and specific. This is because, in most instances, the policy will not be canceled at the time of dissolution. {See In Re Marriage of Fonstein (1976) 17 CA3d 738}.
Insurability questions: If the insured individual has questions concerning insurability, such as due to health issues, the value of the policy needs to be more closely analyzed. In such cases, it is not as simple as to whether the individual is insurable, as this matter has been addressed in several Appellate decisions.
Term Insurance Valuation Considerations
Term life insurance has no cash surrender value. Thus, it would seem as though term life policies should not be considered having value when determining property value. Courts in California, however, have been inconsistent in their treatment of term life insurance valuation.
For example, at least one court has determined that a term life policy has economic value based on its replacement cost, face value and potential to be converted into a whole life policy. {See In re Marriage of Gonzalez, 168 Cal. App. 3d 1021, 214 Cal. Rptr. 634 (1985)}. In contrast, another court ruled that term life insurance only has value after the death of the insured and, as a result, is not divisible in a Family Law matter. {See In Re Marriage of Lorenz (1983) 146 CA 3d 484, 468}.
Due to the inconsistency of the Courts, you could argue the validity of several different positions concerning the value of term life insurance. A mistake would be to only consider the findings of one reported case in formulating your argument, as this could result in a non-optimal outcome for your client. Rather, consideration of all of the factors that have been addressed by the Courts will enable you to make a better analysis. Therefore, you may wish to consult with a Forensic Accountant to help formulate an argument that should prove favorable for your client.