LEGAL VIEW / JEFFREY S. KLEIN and LOUIS M. BROWN : When Couples Share Insurance

Who owns your life insurance policy?

That may sound like a typically legal, mundane and esoteric question, but it could be a significant one when it comes to a divorce or estate planning.

Let’s take a situation where the husband works and the wife doesn’t. He has a $10,000 life insurance policy whose premiums are paid out of his earnings.

Because all income earned during a marriage is jointly owned, the policy is owned by the “community,” that is, by husband and wife.

Now, suppose the wife dies. Who owns the policy?

Well, half of the value of the policy belongs to the wife’s estate--and will be directed to her heirs in accordance with her will, assuming she has one. (She may, of course, leave it all to her husband.)

Some policies have a “value” called a cash surrender value and some don’t. Check with your insurance agent for a detailed explanation.

If the husband continues to pay the annual premiums after his wife’s death, then upon his death, the proceeds of the policy will be included in his estate for estate tax purposes. (Estate taxes start only when assets total more than $600,000.)

The named beneficiary of the policy, perhaps his child, will receive the proceeds.

See how sticky this can get?

Imagine the arguments that might ensue during a divorce.

The policy is owned by the community during the marriage, so upon divorce, it should be split evenly.

Sometimes a court will order the assets of the community, such as a house, sold, and the proceeds divided. That can happen to an insurance policy, too.

But often, the life insurance policy will continue in some way. If the parties agree, one policy of $10,000 can be split into two policies of $5,000.

Now the wife owns a policy on the life of her ex-husband.

Unless they agree otherwise, or there is a court order, either one can cash in his or her own policy, change the beneficiary, or drop it by not paying premiums.

Consider another situation. Suppose a bride has a policy on her life before marriage. She served in the military and has an excellent policy.

At that point, it is her “separate” property. But after the marriage, the premiums are paid with community earnings.

A portion of the policy would remain her separate property, but part of it would become community property.

How is that determined?

It usually only becomes an issue in divorce court or probate court. In such cases, the judge orders allocations based on the proportion of premiums paid after the marriage.

All this suggests that before a couple weds, especially if there are large assets or insurance policies involved, they should consult a lawyer.

Klein is an attorney and president of The Times Valley and Ventura County Editions. Brown is professor of law emeritus at USC and chairman of the board for the National Center for Preventive Law. They cannot answer mail personally but will respond in this column to questions of general interest about law. Do not telephone. Write to Jeffrey S. Klein, The Times, 9211 Oakdale Ave. , Chatsworth, Calif. 91311.