Life Insurance Interpleader

How a life insurance claim normally works

A life insurance policy is a contract. When the insured person dies, the insurer pays the death benefit to the beneficiary designated under the policy, usually on the most recent beneficiary form the insurer accepted. If the primary beneficiary has died, a contingent beneficiary is paid. If no one validly named survives, the policy’s own default rule applies, which often directs payment to the insured’s estate.

In the ordinary case, a beneficiary submits a claim form and a death certificate, and the insurer pays. Interpleader enters the picture when the insurer receives a second, inconsistent claim that it cannot dismiss as baseless. Paying either claimant carries a risk that a court will later order the insurer to pay the other claimant too.

Why insurers interplead

Insurers do not need to be sure who will win before they interplead. A stakeholder needs only a good-faith belief that there are or may be colorable competing claims, which the Ninth Circuit has described as “not an onerous requirement.”¹ Common situations include:

Divorce without an updated designation

The insured named a spouse, later divorced, and never changed the form. The former spouse claims as the named beneficiary. The insured’s children, current spouse, or estate argue that the divorce, a divorce decree, or a state statute cuts off the former spouse’s rights.

Change-of-beneficiary problems

A new form was signed but never reached the insurer, arrived after death, was incomplete, or was submitted while the insured was seriously ill. Claimants may dispute whether the insured “substantially complied” with the policy’s change procedure, or whether the change reflected the insured’s own decision.

Competing documents

A will, trust, or divorce settlement says one thing and the beneficiary form says another. Courts generally hold that a will does not override a beneficiary designation, because the policy proceeds pass by contract rather than through the estate. An Indiana appellate court described this as the majority rule: an attempt to change a beneficiary by will, without following the policy’s procedure, is ineffective, subject to narrow exceptions.² But divorce decrees and settlement agreements that required the insured to keep a particular beneficiary in place can create enforceable rights, depending on the governing law.

Minor or incapacitated beneficiaries

An insurer generally cannot obtain a valid release from a minor. If no guardian or conservator has been appointed, the insurer may interplead so a court can decide how the money will be held. In federal court, the judge must appoint a guardian ad litem or issue another appropriate order to protect an unrepresented minor or incompetent person.³ See minor beneficiaries.

A beneficiary accused of causing the death

Every state reviewed for these guides bars a person who unlawfully and intentionally kills the insured from collecting, by statute or by court decision (see the slayer rule guide for a state-by-state table). Until a criminal or civil court resolves that question, insurers usually hold the money. Minnesota’s statute is one example: it bars the killer from receiving the proceeds and requires the insurer, once it receives written notice of the allegation, to “withhold payment of the policy proceeds to all beneficiaries” pending a court order.⁴

Near-simultaneous deaths

When the insured and the beneficiary die in the same event, the outcome may depend on who survived whom. State simultaneous-death laws fill the gap. Minnesota, again as an example, provides that when there is “no sufficient evidence” that the insured and beneficiary died other than simultaneously, the proceeds are distributed “as if the insured had survived the beneficiary,” unless the policy provides otherwise.⁵

Disputes over who owns the policy

Most disputes are about the beneficiary, but some are about ownership. Two federal complaints illustrate this:

• A second-to-die policy after a co-owner’s death. In American General v. Henneberg (E.D. La.), a $600,000 policy issued in 1990 insured a married couple’s joint lives and paid on the second death. Their two children were co-owners and equal beneficiaries. According to the insurer’s complaint, one child died in 2018, and in 2021 the other asked to make himself sole owner and beneficiary, a change the insurer acknowledged. The late co-owner’s children then claimed that her ownership interest had passed to them. After the surviving insured died in June 2022, they claimed beneficiary status as well, and the insurer filed in August 2022.⁶
• A policy transferred to an investor trust. In American General v. Alexander (C.D. Cal.), a $3,500,000 universal life policy was issued in 2008 to the insured’s irrevocable trust. According to the insurer’s complaint, a series of assignments and ownership changes made a funding trust, with a bank as trustee, the owner and beneficiary by 2014. After the insured died in July 2022, the executor of his estate wrote that the assignments had been procured by fraud and that the benefit belonged to the estate, and the estate’s lawyer warned the insurer not to pay the owner of record. The funding trust filed a claim, and the insurer filed a statutory interpleader in February 2023.⁷

These are the insurers’ allegations, not findings.

State revocation-on-divorce laws

Many states have adopted laws that automatically revoke a beneficiary designation of a former spouse when a marriage ends, unless a court order, settlement agreement, or the instrument itself provides otherwise. These laws treat the former spouse as if he or she had died, so the money goes to the contingent beneficiary or the estate.

Minnesota’s version provides that dissolution or annulment of a marriage “revokes any revocable … beneficiary designation” made to a former spouse, and that the instrument is then read “as if the former spouse died immediately before the dissolution or annulment.”⁸ The same statute protects an insurer that pays the named beneficiary in good faith before receiving written notice of the divorce, and allows an insurer that has received notice to pay the money into court and be discharged.⁹

† Sveen v. Melin, 584 U.S. 811 (2018). The lower-court decision is captioned Metropolitan Life Ins. Co. v. Melin, 853 F.3d 410 (8th Cir. 2017), reflecting that the insurer brought the competing claims to court.

Not every state has such a law, the laws differ in detail, and they may not apply to every kind of policy. Most importantly, they often do not control when federal law governs the policy.

When federal law governs the policy

Three large categories of life insurance are governed by federal law, and in each the Supreme Court has held that federal rules override state laws that would redirect the money.

ERISA employer plans

ERISA requires plan fiduciaries to act “in accordance with the documents and instruments governing the plan,”¹⁰ and it preempts state laws that “relate to” covered plans.¹¹ In Egelhoff v. Egelhoff, a Boeing employee had named his wife as beneficiary of both his employer-provided life insurance and his pension. They divorced, and he died about two months later without changing either designation. His children relied on a Washington statute revoking designations of former spouses. The Supreme Court held that the statute was preempted as applied to the ERISA plans, so the designation on file controlled.¹²

In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, the Court held that an administrator properly paid an ERISA plan benefit to the ex-wife named on the form, even though she had waived her interest in the divorce decree, because the administrator must follow the plan documents. The Court expressly left open whether the estate could sue the ex-wife after she received the money.¹³ The Third Circuit later held that such a suit could proceed.¹⁴

Kennedy involved a savings and investment plan rather than life insurance, but courts apply its plan-documents rule to ERISA life insurance plans as well. Note that ERISA’s ban on assigning or alienating benefits applies by its terms to pension plans, not to welfare plans such as group life insurance.¹⁵

Federal employees: FEGLI

For FEGLI, federal law sets an order of precedence. First in line is the beneficiary designated “in a signed and witnessed writing received before death in the employing office” (or, for some, the Office of Personnel Management). The statute says that a designation in a will or other document “not so executed and filed has no force or effect.” If no valid designation exists, payment goes in order to a surviving spouse, children and descendants of deceased children, parents, the executor or administrator, and then next of kin.¹⁶ A court decree of divorce, annulment, or legal separation, or a related court order or settlement, can control, but only if the employing agency (or OPM for a separated employee) received it before the employee’s death.¹⁷

In Hillman v. Maretta, a federal employee named his then-wife as FEGLI beneficiary, divorced, remarried, and never changed the form. The named ex-wife collected about $124,558. Virginia law gave the widow a cause of action to recover the money from her. The Supreme Court held that the Virginia provision was preempted because Congress intended the proceeds to belong to the named beneficiary.¹⁸

Servicemembers and veterans: SGLI and VGLI

SGLI and VGLI follow a similar federal order of precedence, beginning with the beneficiary designated in a writing “received prior to death” by the appropriate office.¹⁹ In Ridgway v. Ridgway, a Maine divorce decree ordered a soldier to keep his life insurance for the benefit of his children; he later remarried and changed the designation to pay the proceeds “by law,” which under the federal statute meant his widow. The Supreme Court held that the designation under the federal program prevailed over a constructive trust that the state court imposed for the children.²⁰

Can a court undo the payment later?

When federal law requires an administrator or insurer to pay the named beneficiary, the losing side sometimes sues the beneficiary afterward, arguing that the beneficiary must hand the money over because of a divorce settlement or state law. The answer depends on the program and the court:

• For ERISA plans, Kennedy left the question open, and some courts (including the Third Circuit in Kensinger) have allowed such suits to enforce a valid waiver.¹⁴
• For FEGLI, Hillman held a Virginia statute creating such a cause of action preempted.¹⁸ The Tenth Circuit later applied Hillman to hold state-law claims against the beneficiary of a federal Thrift Savings Plan account preempted.²¹

Because the rules vary by program and by circuit, the type of coverage is often the first thing lawyers examine in these disputes.

What happens in the interpleader

When an insurer interpleads, it typically:

1. Files a complaint naming every person who has claimed, or might claim, the proceeds.
2. Deposits the death benefit (and sometimes accrued interest) with the court, or asks for permission to do so.
3. Asks to be dismissed and discharged from further liability, and sometimes asks for its attorney’s fees from the fund.

The claimants then litigate or settle. The guides on being named in an interpleader and on discharge, fees, and interest explain each step. Summaries of the Supreme Court decisions above are in our key decisions library.

Footnotes

1. Michelman v. Lincoln National Life Ins. Co., 685 F.3d 887, 894 (9th Cir. 2012). Opinion (PDF). ↩

2. Cook v. Equitable Life Assurance Society, 428 N.E.2d 110 (Ind. Ct. App. 1981). ↩

3. Fed. R. Civ. P. 17(c)(2). Cornell LII. ↩

4. Minn. Stat. § 524.2-803(d). Minnesota Revisor of Statutes. Slayer statutes differ by state, and federal programs may apply their own rules. ↩

5. Minn. Stat. § 524.2-702(b)(4), (d). Minnesota Revisor of Statutes. ↩

6. Complaint for Interpleader Relief ¶¶ 7–16, American General Life Ins. Co. v. Henneberg, No. 2:22-cv-02721 (E.D. La. filed Aug. 18, 2022), ECF No. 1, complaint (PDF). Allegations only. ↩

7. Complaint for Interpleader Relief ¶¶ 4, 7–24, American General Life Ins. Co. v. Alexander, No. 2:23-cv-00916 (C.D. Cal. filed Feb. 7, 2023), ECF No. 1, complaint (PDF). Allegations only. ↩

8. Minn. Stat. § 524.2-804, subds. 1–2. Minnesota Revisor of Statutes. ↩

9. Minn. Stat. § 524.2-804, subd. 5. ↩

10. 29 U.S.C. § 1104(a)(1)(D). Cornell LII. ↩

11. 29 U.S.C. § 1144(a). Cornell LII. ↩

12. Egelhoff v. Egelhoff, 532 U.S. 141 (2001). Cornell LII. ↩

13. Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285, 299 n.10 (2009). Cornell LII. ↩

14. Estate of Kensinger v. URL Pharma, Inc., 674 F.3d 131 (3d Cir. 2012), as described by the Eleventh Circuit in MetLife Life & Annuity Co. of Connecticut v. Akpele, 886 F.3d 998 (11th Cir. 2018), and followed by the Fourth Circuit in Andochick v. Byrd, 709 F.3d 296 (4th Cir. 2013). Opinion, Justia. ↩ ↩²

15. 29 U.S.C. § 1056(d)(1) (“Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.”). Cornell LII. ↩

16. 5 U.S.C. § 8705(a). Cornell LII. ↩

17. 5 U.S.C. § 8705(e). ↩

18. Hillman v. Maretta, 569 U.S. 483 (2013). Cornell LII. ↩ ↩²

19. 38 U.S.C. § 1970(a). Cornell LII. ↩

20. Ridgway v. Ridgway, 454 U.S. 46 (1981). Cornell LII. ↩

21. Evans v. Diamond, 957 F.3d 1098 (10th Cir. 2020) (No. 19-4083), aff’g 389 F. Supp. 3d 979 (D. Utah 2019). ↩