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Alabama Divorce--Life Insurance, Annuities and Pension Plans

The Alabama Court of Civil Appeals issued a ruling concerning the post-divorce treatment of beneficiary designations naming a former spouse.  Kowalski v. Upchurch, [2131059, July 17, 2015] (Ala. Ct. Civ. App. 2015) (divorce did not revoke beneficiary designation naming former spouse).

In Kowalski v. Upchurch, the Alabama Court of Civil Appeals held that divorce, by itself, does not revoke a beneficiary designation naming a former spouse as beneficiary of a payable-on-death annuity.   Kowalski reaffirms Alabama case law that has consistently applied this rule to life insurance policies, annuities, and pension plans. Divorce decrees and settlement agreements can revoke beneficiary designations, but only if it is made clear in the decree or agreement. Language referencing a general divestment of property in a divorce decree or settlement agreement will not be effective to revoke the beneficiary designation. However, the Alabama Legislature has recently enacted a new statute—Act 2015-312—that will change the result in Kowalski going forward. Effective September 1, 2015, divorce will operate to revoke a beneficiary designation naming a former spouse (under normal circumstances).

In Kowalski, the insured spouse purchased a variable deferred annuity contract and initially named her son as the beneficiary. However, three years before her divorce, the insured spouse changed the designation by naming her then husband as primary beneficiary. After the parties divorced, the insured spouse neglected to change the beneficiary designation of her annuity contract. Upon her death, both the insured spouse's son and the former husband sought payment of the death benefit, eventually leading to a civil action in the circuit court. The circuit court held in favor of the son. Its holding was based on a provision of the divorce settlement agreement which divested the former husband of any interest in all items of property belonging solely to his former spouse, including insurance policies.

The Court of Civil Appeals reversed, stating that there was no specific, direct or express reference to the annuity contract (or the proceeds received therefrom) in the divorce settlement agreement that revoked the beneficiary designation in favor of the former spouse. The court believed the divestment language in the settlement agreement was not specific enough. Based on prior Alabama case law, beneficiaries under insurance policies (and similar contracts) retain their status after divorce unless it clearly appears from the settlement agreement that the parties intended the beneficiary designation in favor of the former spouse to be revoked.

According to the court, the divorce settlement agreement only divested the former spouse of ownership rights in the insured spouse's annuity contract. Ownership rights and rights as a beneficiary are two separate and distinct things, however. The beneficiary's right to the proceeds of insurance arises out of a contractual relationship, not a marital relationship. Therefore, the divorce does not work a revocation of the beneficiary's rights under an annuity contract, according to the court in Kowalski.

However, Act 2015-312 will change the result in Kowalski going forward. Under Act 2015-312, unless the divorce decree or settlement agreement provides otherwise, a beneficiary designation in favor of a former spouse is revoked upon divorce or annulment. Act 2015-312 will not apply to beneficiary designations that are irrevocable or to insurance policies on which the former spouse is listed as the owner or pays the premiums following the divorce or annulment. Act 2015-312 is effective September 1, 2015.