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The California appellate court held that the characterization of term life insurance policy death proceeds as community or separate property depends, not only on who paid the final premium (i.e., was it paid with separate or community funds), but also on other factors such as (1) the insurability of the insured and (2) whether the amount of the final premium payment is capped or otherwise discounted against the current market cost of comparable coverage.
If a final premium payment is paid with separate assets, to the extent that the final premium represents the cost of the insurance coverage for the final period of coverage in which the insured died, the death proceeds should be separate property. However, to the extent that the coverage being purchased is worth more than the final premium payment, either because the medical state of the insured would render him uninsurable at that time (or more costly to insure) or because the renewal premium is capped or discounted from what is generally available for comparable coverage in the market place, then a court may determine that some portion of the renewed coverage has been paid for by prior premium payments which may have been made with community assets.
This Court therefore sent the case back to the trial court for further factual findings regarding the allocation of the final premium payment between the current annual cost of term coverage and the value of the renewal rights.
This article was originally published in the November 2013 edition of WRNewswire – An AALU Washington Report. Permission for article reprint has been granted.