Law revoking beneficiary status didn’t apply retroactively

A new decision from a federal appeals court should give every divorced person incentive to look over his or her insurance policies and other financial documents to make sure beneficiaries have been changed. This holds true even in states with laws that automatically revoke a now-ex-spouse’s beneficiary status upon divorce.

The federal appeals court case concerned Minnesota couple Mark Sveen and Kay Melin, who got married in 1997. Mark had two children from a prior marriage and these kids were the primary beneficiaries on a life insurance policy that he had in place. But once he got married, Mark made Kay his primary beneficiary, with his kids as beneficiaries of a different policy.

The couple divorced after 10 years. Mark never removed Kay as the beneficiary after the divorce, although Kay claims that Mark agreed to keep her as the beneficiary in exchange for giving him a better property settlement.

Mark died in 2011. After his death, his children argued that they should receive the proceeds of the policy even though Kay was still the beneficiary. In making their argument, they pointed to a Minnesota state law passed in 2002 that states that once a couple gets divorced, an ex-spouse’s status as primary beneficiary of an insurance policy is automatically revoked.

A federal district court judge agreed with them and ordered that they get they the proceeds of the $180,000 policy.

But the appeals court held that the state law didn’t apply retroactively. More specifically, the court said that applying the law to insurance contracts that were entered into before the law was passed would be a “substantial impairment of contract” that violates the Contract Clause of the U.S. Constitution.

Now the dad’s kids get to watch their ex-stepmother walk away with nearly $200,000 that arguably should be theirs. This is a situation that might have been avoided if their father had changed his beneficiary designations as soon as he got divorced.