Life Insurance

Understanding Community Property States

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The term "community property" frequently pops up in discussions about divorce. Much like "marital asset" or "marital property," it refers to assets co-owned by a couple.

Community property also applies to life insurance and other topics related to estate planning.  If you live in any of the nine community property states that follow this allocation method, it's essential to understand the basic meaning of community property.

Simply put, all assets, income, and debts acquired during a marriage are owned equally by the spouses. This includes tangible things like a home, car, boat, and furnishings, as well as retirement accounts, investments, and in many cases, life insurance. Married couples are also jointly responsible for any consumer debt, mortgages, or loans incurred while married. 

Any assets owned before marriage generally remain the original owner's personal property. The same goes for property or money that was gifted, inherited, or that you receive as a beneficiary on a life insurance policy. However, if an inheritance in a community property state is deposited into a joint bank account, it can be considered a marital asset. 

There are no national uniform laws or regulations, which means determining what is community property and what isn't varies from state to state. Spouses can also opt out of the community property allocation by signing an agreement specifically identifying marital property.

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What is a community property state?

Laws occasionally change, so if you consider changing your marital status, buying life insurance, or acquiring a valuable asset, it's helpful to know which states are community property states. Check your state's laws here. The current community property states list includes:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

The other 41 states are referred to as common law states. While Alaska, Florida, Kentucky, South Dakota, and Tennessee allow married couples to opt into community property agreements, they're still common law states. 

What's the difference between community property states vs. common law states? In a common law state, the assets and debts acquired by one spouse belong to the individual who purchased them or incurred the debt. In these non-community property states, the spouse whose name appears on the title of an asset retains full ownership and can determine what happens to it in the event of divorce or death. 

Is life insurance community property?

The short answer is a qualified yes. In a community property state, if life insurance premiums are paid using income earned while married, the policy is considered community property. This holds true even if you purchased the policy before getting married.  

While the policyholder in a community property state can still name other beneficiaries, the spouse is legally entitled to 50% of the death benefit even if they aren't listed as a beneficiary. Of course, married couples can sign an agreement to override community property laws and distribute benefits in any way they choose. 

However, if premiums are paid with an inheritance in community property states, the policy is unlikely to be considered marital property. An exception would be when inherited funds are deposited into and paid from a joint account.

Life insurance for married couples and newlyweds

Ethos provides a range of online life insurance policies ideal for married couples living in both community property and common law states. In our newlywed planning guide, you can learn more about life insurance for married couples and calculate how much insurance you need simply by answering a few simple questions.

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