Life insurance payout - community property or separate property?

Question

In a community property state (e.g., California, Texas), if one spouse receives a life insurance payout from the death of their parent during the marriage, and then they divorce, does the payout automatically become community property or is it considered separate property? Assume the payout has been kept in a separate bank account and not touched or commingled with other shared funds, and there is no specific mention in the parent's will about the life insurance payout.

Answer 1

Donative transfers, such as gifts and inheritances, are generally separate property in community property regimes.

The main exception would be if the child was the owner of the life insurance policy, rather than just the beneficiary. In that case, if the life insurance policy premiums were paid for with community property, the life insurance policy would be community property.

Life insurance policies generally have three people associated with them:

• The owner: who pays the premium, has access to any cash value in the policy, and chooses the beneficiary of the policy,
• The insured: whose death triggers a payout on the policy, and
• The beneficiary: who receives the death benefit when the insured dies.

The owner must have what is called an "insurable interest" in the life of the insured. If the owner does not have an insurable interest in the life of the insured, then the contract is an illegal gambling contract. But, generally, someone has an insurable interest in themselves, close family members, and people whom they have economic relationships with, such as business partners or unmarried cohabitants.

The treatment of appreciation in the life insurance policy once the payout is received by the beneficiary is less consistent. Some community property states treat appreciation in separate property during the marriage as separate property, while others treat appreciation in separate property during the marriage as community property even though the principal amount remains separate property.