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A spouse's right to life insurance money

With permanent life insurance, such as whole life or universal life, the proceeds are prorated according to the percentage of premiums paid with "community" money.

Say, for instance, a man buys a whole life policy two years before he gets married and one year after his marriage. He uses his own money to pay for the first two years of premiums and income earned after the wedding to pay for the next year, and then dies. In this case, if he names someone else as beneficiary, his wife would have rights to 50 percent of one-third of the death benefit payout, Hicks says.

Excluding a spouse

What if you want to leave the entire death benefit to someone other than your spouse? That raises a variety of issues about community property rights to the policy's benefit, says Katie Groblewski, a Stokes Lawrence estate planning attorney.

Groblewski says that in certain instances it may make sense for spouses to sign a "property status agreement," which states that the life insurance policy is separate, rather than community, property. In addition, in certain cases, the insurer may require the non-insured spouse to sign a consent form to waive rights to the death benefits. The requirements to create a "property status agreement" vary from state to state.

However, without the property status agreement, a spouse's waiver to his or her community property right to half of the death benefit could be deemed a gift from that spouse to the policy beneficiary.

"This 'deemed gift' could have unintended gift or estate tax consequences to the surviving spouse," Groblewski says.

Beneficiary decisions can be complicated, particularly for blended families where there are children from more than one marriage.

"It's very important to coordinate beneficiary designations with an overall estate plan," Groblewski says. "An estate attorney is probably the one attorney every person ought to see."

Forgetting to update the beneficiary

Sometimes an ex-spouse is named as the beneficiary by mistake because the husband or wife forgot to change the beneficiary after divorce.

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