Who is entitled to life insurance benefits? This may seem an easy answer and is most of the time, but not always.
According to the Texas Supreme Court and Texas Insurance Code, Section 1103.102, the designated beneficiary of a life insurance policy generally is entitled to the proceeds upon the death of the insured. Absent an adverse claim, the insurance company may pay the benefits to the designated beneficiary.
However, the insured’s pledge of the policy proceeds may give a creditor rights superior to the named beneficiary’s according to the 1968, Texas Supreme Court opinion, McAllen State Bank v. Texas Bank & Trust Co.
When an insurance company is faced with rival claims, the insurance company may avoid extra-contractual liability by filing an interpleader suit and paying the money into the registry of the court so the issue of who gets the proceeds can be judicially resolved. This was stated in McFarland v. Franklin Life Insurance Co, a 1967, Texas Supreme Court opinion and in Texas Rules of Civil Procedure, Rule 43.
An insured may change the beneficiary designation by substantially complying with whatever requirements the policy imposes. “Substantial compliance” means the insured did all he reasonably could do to effect the change. Without substantial compliance, a mere intent to change the beneficiary is not enough.
The 1984, Texas Supreme Court opinion, Tomlinson v. Jones, says the insured must have sufficient mental capacity to effect the change of beneficiary. As an example, in the Tomlinson case, the insured’s medical records painted “a grim picture of a man critically injured and in great pain, at times heavily drugged, at time hallucinating, with little possibility of survival.” The physician’s discharge summary prepared by Tommy’s physician after Tommy’s death stated that “in spite of all the medical measures (drugs, respirator, etc.), the patient continued his downhill course.” This was sufficient evidence of “physical problems … consistent with mental incapacity,” which supported the jury finding that the insured lacked the mental capacity to change his beneficiary.
As life insurance beneficiary’s relate to spouses, one spouse can designate his or her estate as the beneficiary of the policy, at the expense of the other spouse, absent any showing of actual or constructive fraud.
Policies may contain provisions automatically divesting a spouse of interest in the proceeds, if the parties are “legally separated” or divorced. Also, the divorce decree may divest the former spouse of any right to the insurance proceeds. By statute, Texas Family Code, Section 9.301, a divorce invalidates any pre-divorce designation of the former spouse as beneficiary, unless the former spouse is re-designated. If the pre-divorce designation is invalidated, the proceeds go to any alternate beneficiary or to the insured’s estate. If the insurer pays the former spouse based on an invalidated designation, the insurer is liable to pay the proper beneficiary.