Divorced Couples Need to Update Beneficiary Designations

One of the most important things people can do after a divorce is to update their beneficiary designations, and indicate who should get the assets in various accounts if they should unexpectedly pass away.

Most married people name their spouse as the beneficiary of their accounts, but in the stress following a divorce, they often forget to update these designations.

And even when people make an effort, they might not remember every account. Pensions, 401(k) plans, life insurance policies, brokerage accounts, bank accounts, and more may all have listed beneficiaries.

Remember that if you die, who gets the money in these accounts usually depends on who is the listed beneficiary – not who is named in your will. Even if your will says that “everything” will go to a new spouse or a child or other relative, the will doesn’t govern a separate account such as a 401(k) or an insurance policy.

Some states have tried to help divorced people by passing laws that say that a divorce automatically revokes these types of beneficiary designations. But even where that’s true, you need to name a new beneficiary, or the money might still go to someone who is not your choice.

Also, these laws don’t always work. For instance, Warren Hillman was a federal employee in Virginia who had low-cost group life insurance through a special program for federal workers. Warren married Judy in 1996 and named her as his life insurance beneficiary, but he divorced her two years later. In 2002, he married Jacqueline, but for whatever reason he never changed the beneficiary on his life insurance.

In 2008, Warren died. Both his wives claimed his $125,000 life insurance proceeds.

The case went all the way to the U.S. Supreme Court. The court said that, under Virginia law, a divorce revokes beneficiary designations such as on a life insurance policy. However, because the life insurance in this case was arranged under a federalprogram, and federal law trumps state law, the Virginia law didn’t apply – and therefore first-wife Judy, not second-wife Jacqueline, got the funds.

Of course, even people who haven’t been through a divorce should periodically review their beneficiary designations to make sure they’re all current, because these designations are an important part of a well-constructed estate plan.