Regular Life Insurance Review: A Lesson in the Supreme Court
June 27, 2013 by Lori Messina, JD
By Lori Messina, JD
It’s standard advice that financial professionals give all of their clients: Be sure to update your beneficiaries whenever you have a life-event change. Unfortunately, amid the upheaval that such changes in circumstances cause, many clients simply forget to update things like beneficiary designations. The fact is, changing beneficiaries on a life insurance policy just doesn’t seem as appealing to a client as planning a honeymoon or preparing a room for a new baby’s arrival. However, a recent U.S. Supreme Court decision placed an exclamation point at the end of the old advice on updating your beneficiaries: in Hillman v. Maretta, the Court unanimously found that federal law preempted a Virginia statute designed to protect the interests of those who failed to change beneficiaries following a divorce.
Even in Estate Planning, State Law Can’t Protect You Where Federal Law Provides Otherwise
As you would expect, federal benefit plans are governed by specific federal laws and regulations that enact and administer them. For example, the Federal Employees Group Life Insurance Act of 1954 (FEGLI) created a life insurance program covering federal employees. FEGLI, like other life insurance, prioritizes payments to a policy’s named beneficiaries. However, problems arise if federal employees with FEGLI policies divorce their spouses, then remarry, but fail to change their beneficiary designations before death. Under federal law, these ex-spouses are entitled to receive the benefits, regardless of the insureds’ wishes.
This problem isn’t unique to FEGLI, and can appear in many insurance policies. However, a Virginia law tried to rectify the problem by revoking the beneficiary designation in any contract that provided a death benefit to an ex-spouse if the grantor had not already done so. Alternatively, the Virginia statute also provided a cause of action against the ex-spouse in order to recover the benefits paid under such a contract.
Thus, in the Hillman case, Warren Hillman held a FEGLI policy naming his then-wife Judy Maretta, as beneficiary. He subsequently divorced Ms. Maretta and married Jacqueline Hillman, but failed to remove Ms. Maretta as a beneficiary under the FEGLI policy. When Mr. Hillman died, Ms. Maretta, as the named FEGLI beneficiary, collected the policy’s benefits. Ms. Hillman then filed suit under the Virginia statute to recover the proceeds. However, the U.S. Supreme Court found that the action to collect the proceeds was preempted, or nullified, by FEGLI. Why? Because the Virginia law implied that someone other than the person indicated by the FEGLI payment plan had a right to the FEGLI benefits. In other words, because the state law conflicted with the federal law, the state law failed. While the Hillman holding strictly applies to FEGLI and federally-authorized programs such as 401(k) plans, the case highlights the broader rule for your clients: you must update your financial information whenever you experience a change in circumstances, in order to ensure that your wishes are protected.
While State Law Might Not Be Able to Help Your Clients, You Can
Thus, Hillman, on its surface, provides a valuable reminder of the importance of updating financial records and beneficiary designations. However, many of your clients will continue to fail to take the initiative in making such changes. That’s one reason why regularly reviewing your clients’ circumstances and financial holdings is so critical. By meeting with your clients, and reviewing their life insurance and other financial investments, you can help ensure not only that they are pursuing the best possible financial strategy, but that those investments will ultimately perform how your clients want them to. For a financial professional, that is the hidden takeaway from Hillman.
