Life insurance policyholders and their newlywed beneficiaries may want to head immediately from the altar to the office to change beneficiary designations if their life insurance is in the form of a federally funded policy under The Federal Employees’ Group Life Insurance Act of 1954 (“FEGLIA”). While most people understand that the failure of a policyholder to update a beneficiary designation can have especially devastating—and presumably unintended—consequences where beneficiary designations are not changed after divorce and remarriage, the Supreme Court has cemented that concept in certain situations.
In Hillman v. Maretta, the United States Supreme Court issued a ruling that resulted in a windfall to an ex-wife and a stroke of misfortune to a widow, while at the same time sending the message that state laws—even well-meaning ones—will not be enforced if they conflict with federal law. In Hillman, the policyholder had a life insurance policy under FEGLIA, which is a program that establishes life insurance for federal employees. The policyholder designated his first wife, Judy Maretta, as the beneficiary. Several years later, the policyholder divorced his first wife and married Jacqueline Hillman. He never changed the beneficiary on his policy from Maretta to Hillman, however, and he died shortly thereafter.
Hillman made a claim for the proceeds, but was told by the FEGLIA administrator that the proceeds would be payable to Maretta, the policyholder’s first wife. Hillman filed suit in the Virginia state court, seeking to invoke a state statute that renders a former spouse liable to whoever would have received the proceeds under the applicable state law, but for the beneficiary designation. Upon consideration, however, the Supreme Court found FEGLIA, which required beneficiary designations and changes to be in writing and filed with the government, preempted Virginia state law.
According to the Court, state laws may be pre-empted by federal law in certain situations and even in those areas of the law that are typically subject to state regulation, such as domestic relations, where the state laws do “damage” to “clear and substantial” federal interests. In analyzing whether the Virginia statute would be preempted, the Court looked at Congress’ purpose in enacting FEGLIA, its past rulings in similar cases, and the effect of the Virginia statute to enable a person other than the beneficiary to receive the proceeds.
The Court recognized the appeal of the Virginia statute, which is to remedy what could have been mere oversight or neglect on the part of the policyholder to update his or her beneficiary designation, but it found ultimately that Congress had not made the same judgment and that it put priority on the legally designated beneficiary. According to the Court, “where a beneficiary has been duly named, the insurance proceeds she is owed under FEGLIA cannot be allocated to another person by operation of state law.”
While Hillman only applies to federally-funded life insurance policies where rules regarding designations are governed by statute, it is worth noting that federal regulation can preempt state law. Policyholders should not only keep their designations current, but also understand the law that governs their policies and the formalities necessary to make beneficiary designations valid. If “the determination of life insurance salesmen to succeed has made life pretty soft for widows,” then the determination of the United States Supreme Court, in upholding what it deemed preemptive Congressional intent, can make life tough for a few.