As is the case for everyone (and as we previously discussed in our prior post, Rock, Paper, Scissors: Life Insurance Beneficiary Designation Beats Will), based on the United States Supreme Court decision in Hillman v. Maretta, if you are a federal employee, you should carefully consider who is listed as beneficiary of your life insurance policy. In Hillman, the Court favored Warren Hillman’s ex-wife, Judy Maretta, over his widow, Jacqueline Hillman, and not because the former was more deserving or the marriage to the latter was overly capricious. $124,558 of life insurance benefits accrued to the ex-wife because the husband neglected to send the federal government’s Office of Personnel Management the necessary documentation to change his beneficiary designation before his death.

Judy was named as Warren’s federal life insurance beneficiary two years prior to their divorce. Warren legally married Jacqueline four years thereafter but did not update his beneficiary designation. The Federal Employees’ Group Life Insurance Act (“FEGLIA”) sets forth an “order of precedence” for payment of life insurance benefits. This order is:

  1. The designated beneficiary(ies)
  2. If none, the surviving spouse
  3. If none, the insured’s descendants
  4. If none, the insured’s parents or their survivors
  5. If none, the executor of the insured’s estate
  6. If none, the insured’s next of kin

FEGLIA also provides a limited exception to the order of precedence if there is a court decree of divorce, annulment, or legal separation or related settlement that expressly provides for the payment of the proceeds to another person, but the exception only applies if the decree, order, or agreement is received by the federal government’s Office of Personnel Management prior to the insured’s death.

Because Warren did not file any of the requisite documentation, his life insurance benefits accrued to Judy—not Jacqueline.

The matter was further complicated by a provision of Virginia state law. § 20-111.1(A) of the Virginia Code revokes a beneficiary designation—here, the federal life insurance plan—that provides for the payment of any death benefit to a former spouse. Jacqueline agreed that this provision of Virginia law was void because it clearly conflicted with the aforementioned federal law. Instead, she relied upon Virginia’s § 20-111.1(D), which “renders a former spouse liable for insurance proceeds to whoever would have received them under applicable law, … but for the beneficiary designation.” Under Virginia’s “applicable law,” Jacqueline “would have received [the benefits].”

The Court focused its decision on the Supremacy Clause’s power to pre-empt state law and found that the federal government had an interest in ensuring that a federal employee’s named beneficiary receives the proceeds of the employee’s life insurance policy. According to the Court’s decision, if a state law is invalid because it names a third-party beneficiary other than the beneficiary identified under federal law, then a state law permitting that third-party to sue and recover benefits paid to the federally-named beneficiary is also invalid. The Court held that a state law cannot indirectly enable an individual to accomplish what that state cannot permit directly. The Court tacitly questioned the logic behind the policy, but stated that the federal law’s preemptive authority is clear.

The moral of this story? If you don’t want your benefits going to your former spouse—tell the people who insure your life. Who knows, if Jacqueline had known that Warren simply needed to notify his employer to ensure that she would receive his life insurance benefits but had failed to do so, she might have divorced him too!

Mike Gallagher.