PROBLEM:

You are fairly certain your debtor has a life insurance policy and you are worried he may try to cash in on it before you get divorced.

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SOLUTIONS:

The law surrounding life insurance policies in divorce can be confusing and fact-specific.  Whether or not a life insurance policy is separate or marital property will depend on factors such as the owner of the policy, the funds that paid the monthly premiums and whether the policy was purchased before or after the marriage.  Nonetheless, it is not uncommon in divorce proceedings to see an automatic temporary restraining order which prohibits selling assets and modifying beneficiaries on life insurance policies.  You are therefore right to be concerned with the status of your debtor’s life insurance policy, and it is quite possible that he is prohibited from selling the policy or removing you as the beneficiary while the proceedings are ongoing.

There is indeed a market for the purchase of life insurance policies where the insured is still living.  In most cases, this market is for seniors.  There are a few ways you could go about learning whether or not your debtor may have sold his policy for cash, known as a life insurance settlement.  First, as we often blog about, tax returns are key to uncovering this asset.

The surrender of a life insurance policy falls under ordinary income for tax purposes.  The best place to find evidence of a life insurance settlement is to look through your debtor’s 1099 forms.  If your debtor sold his policy, he should have received a 1099 form reflecting the difference between the life insurance settlement payment and the total premiums paid on the policy.

Depending on when your debtor sold the life insurance policy, it’s possible that it may not appear on the most recent tax return.  If this is the case, there are other places to look.  If you have a shared computer, take a look through the browsing history.  Does it look like your debtor visited life insurance settlement websites?  If you legitimately have access to the computer, the browsing history is a fantastic way to uncover information.  Be careful, if it is not a shared computer, you may be breaking the law by accessing it.

Finally, don’t forget to use the court’s discovery process to your advantage.  Tell your lawyer everything that you know.  If you think there is a life insurance policy, make sure that you ask for all documents concerning the policy in discovery.  Your lawyer has a general idea of the types of discovery to request, but you probably have an even better idea of the specific types of assets your debtor might have.

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