The term property is familiar to us all. We define things as being "your property" or "my property." As we shall see in this chapter, the term property has both a common meaning and a specialized legal meaning. The common definition of the term generally refers to tangible things such as land, cars, money, or securities. The legal definition, which includes the common usage, gives a broader meaning to the term. It focuses on whether one possesses the right to use tangible and intangible things.

It is easy to demonstrate why the common definition of property is insufficient even for everyday use. For example, a stock certificate is a tangible thing and can be described as a piece of property. Nevertheless, if it is lost or destroyed, the ownership interest in the corporation that the stock certificate represents is unaffected. This is because the ownership interest in the corporation is an intangible property right that is independent of the existence of the stock certificate.

Consider a stock option as another example. One can possess a stock option, and the option is clearly a property right that can be owned or transferred. Since it exists independently of the document that describes it, an option is an intangible property right. One may also possess a property right as the result of an oral contract. In this case there might not be any tangible evidence of the existence of the property right. Nevertheless, this lack of physical evidence does not eliminate the right possessed.

Is a life insurance policy a piece of property? Or is the life insurance contract merely tangible written evidence of an intangible right to property? Of course, the answer is that the life insurance policy is both. The contract is a piece of property, and it is also evidence of intangible property rights.

We have already indicated that a basic understanding of the laws concerning contracts in general is fundamental to an understanding of the unique characteristics of life insurance contracts. The same is true for the laws governing property. To clearly understand the unique property rights various parties hold in life insurance policies, it is necessary to understand the basic rules of property law. The starting point is the basic principle of property law that the term property does not refer only to things that we can see and touch. In the language of the law "property" refers to the collection of ownership rights that permit people, corporations, and trusts to use both tangible and intangible things.

The law of property is divided into two major subdivisions: the law of real property and the law of personal property.

The law of real property, or real estate, is concerned with the land and those things that are a part of or attached to the land. Natural resources such as minerals, crops, and forests are a part of the land. Houses, dams, factories, and bridges are attached to the land. As long as these items of property are a part of or attached to the land, they are subject to the real property laws. When any property is separated from the land, it becomes personal property.

An item of personal property can become subject to the real property laws. For example, when it is in the factory, a furnace is an item of personal property. When it has been installed in someone�s home, it is described as a fixture and is assumed to be part of the real estate. As long as it is attached to the land as a fixture or has not been legally removed from the land, it passes with the title to the land.

Personal property is any property that is not land or not attached to the land. There are two types of personal property, and these two divisions recognize the difference between tangible personal property and intangible personal property. There are no such distinctions in real property law.

Tangible personal property is sometimes referred to in the law as a chose in possession. The word "chose" is French for "thing," and the term is used to describe all of those types of tangible personal property that a person may physically possess�computers, clothes, tennis rackets, and photographs, for example.

Intangible personal property is sometimes referred to in the law as a chose in action. Since this type of property is intangible, it is not really a thing. It is instead a right of action that exists only in the law. An "action" is another word for a lawsuit; therefore a chose in action is a right to do something, usually evidenced by a legal document and enforceable by the law. Mortgages, notes, deeds, and all types of contracts represent intangible personal property rights and are included within the term "chose in action."

A life insurance policy is a chose in action and represents the intangible personal property rights that are described in the policy. The insuring clause on the face page of life insurance contracts, as in the following three different examples, sets forth a broad statement of those rights:

These general provisions and the more specific provisions within the policy language define the intangible personal property rights of the policyowner and the beneficiary. Some property rights are inherent in the law and do not need to be conferred by the policy. Transferability of property is one of these. Unless parties agree to the contrary, the law assumes that a person may freely assign or transfer any property interest that he or she possesses. Therefore, as with most items of real or personal property, the owner may transfer the life insurance contract by sale, collateral assignment, or gift. To protect the rights of the insurer, the transferee, and the policyowner, the contract will prescribe the methods by which such transfers must be effected.

There are at least two other special circumstances when ownership rights in an insurance policy may be transferred. The first is as a result of a divorce. Life insurance protection on either ex-spouse is a valuable asset for the benefit of the children of the marriage or to ensure the continuation of support payments beyond the death of the payor spouse. Thus insurance policies are frequently transferred as a part of a divorce settlement. The second circumstance occurs when the insured is not the policyowner and the policyowner predeceases the insured. This can happen when a parent owns a policy on a minor child or when policies are owned by business partners on each other�s lives for the purpose of a cross-purchase buy-sell agreement. In either case, when the policyowner dies, the policy generally passes to another person pursuant to the applicable intestacy laws or under the provisions of the deceased policyowner�s will. It is also possible that a contingent or successor owner will have been designated in the policy by the initial policyowner. If so, such a designation will take precedence and the policy will pass to the successor owner.

A policy beneficiary usually has no ownership or property rights in a life insurance policy because the beneficiary is not a party to the contract. A revocable beneficiary has nothing more than an expectancy that he or she might receive the death benefits if the beneficiary designation is unchanged and the policy remains in force until the insured�s death. If that expectancy comes to pass, then the property right the beneficiary possesses at the insured�s death is a perfect example of a chose in action. The beneficiary then possesses a right to the proceeds that is enforceable by a court in an action at law.

An irrevocable beneficiary has some limited additional rights prior to the insured�s death, but his or her right to the death benefit is still only an expectancy that will be extinguished if the policy is lapsed. In some jurisdictions an irrevocable beneficiary�s consent must be obtained before a policy loan may be obtained or the policy may be surrendered.

Among the many rights the life insurance contract specifically confers upon the policyowner are the right to surrender the policy, to assign it to a third party as collateral for a loan, to designate and change the beneficiary, to surrender the policy, to obtain policy loans (if the policy has a cash value or cash accumulation account), to select and change dividend options (for participating policies), to select and change investment options (for variable policies), and to select settlement options. In some jurisdictions and for some policies, policyowners are now permitted to claim a portion of the death benefit in advance of the date of death if the insured is diagnosed as terminally ill and is expected to die within a short period of time (usually 6 to 12 months).

In most circumstances the language of the life insurance contract and the general principles of contract or property law determine the extent of a person�s ownership interest in a life insurance policy. However, there are three circumstances that may permit persons who are not parties to the contract to acquire an ownership interest in the policy benefits. The first two relate to the marital status and financial condition of the policyowner. The third arises when the named beneficiary murders the insured and another person acquires the murderer�s interest in the policy proceeds.

With respect to property law, the 50 states of the United States and the District of Columbia are divided into two quite different systems of law: community property and common law property. The common law system is the general rule in the United States. It is based on the common law as it was brought to this country from England. The common law was developed over the centuries as cases were decided by the courts of England.

The community property law system was brought to this country from France and Spain. Since the English common law is the basis of our country�s legal system, community property laws exist only where they have been enacted into law by the state legislatures.

Nine states are considered community property states. Eight of them form a line along the southern and western border of the United States. From east to west, they are Louisiana, Texas, New Mexico, Arizona, California, Nevada, Washington, and Idaho (note that Oregon is not a community property state). In addition, Wisconsin has enacted a form of community property law known as marital property. Although it has not been enacted in any other state, the National Conference of Commissioners on Uniform State Laws has created a model law known as the Uniform Marital Property Act.

The common law system is the law in the 41 other states and in the District of Columbia. Under the common law system, a policyowner�s marital status generally has no direct or automatic effect upon the ownership interests in an insurance policy. A policyowner may marry or divorce, and unless some specific affirmative action is taken with respect to the policy, it will remain the sole property of the policyowner. The marriage does not give the other spouse any interest in the ownership rights of the policy, and it does not give him or her any interest in the proceeds. Furthermore, if a policyowner in a common law jurisdiction designates "my husband, Robert" as the beneficiary of a life insurance policy on her life, it is the general, but not unanimous, rule that "Robert" will remain her beneficiary even if the parties are subsequently divorced. In one state, Michigan, if the divorce decree does not change a beneficiary designation from the ex-spouse to someone else, then the statute mandates that the policy is payable to the estate of the insured until the policyowner designates a new beneficiary.

The community property law system is quite different from the common law system. And, in fact, the differences among the community property states are almost as wide as the difference between the common law jurisdictions and community property law jurisdictions. Be cautious in applying the community property rules discussed in this chapter, because some community property states apply rules that are not consistent with the general rules described herein. Thus students of life insurance as it is affected by the community property laws need to examine the law of the appropriate state closely. A survey of the general principles of community property law is not sufficient.

The impact of the community property legal system, though adopted by a minority of jurisdictions, has been considerable on the entire country. For example, the estate tax marital deduction and the income tax joint return arose from a necessity to equalize treatment of income and property between common law jurisdiction taxpayers and community property jurisdiction taxpayers.

The community property laws are applicable to all residents of community property jurisdictions. If a married couple resides in a common law jurisdiction and acquires personal property while visiting a community property state, the community property laws are inapplicable. Similarly, if a married couple residing in a common law jurisdiction acquires realty in a community property law jurisdiction, it does not normally become community property. Title to that property will be held in whatever manner the parties desire, just as if the property was located in a common law state.

Ours is a very mobile society, and married couples may move their residences from community property jurisdictions to common law jurisdictions and back during their marriage. The effect of these moves between jurisdictions is beyond the scope of this discussion. Life underwriters, however, need to be aware of the potential complications such relocations can cause and must be able to assist their clients in obtaining competent advice.

The fundamental principle of community property is that each spouse has an undivided one-half interest in all property acquired by the husband and wife during the marriage. Like all fundamental rules, there are some exceptions. The basic exception is that property acquired by one of the spouses by gift, under the laws of intestacy, or as a beneficiary of someone�s will is the separate property of the acquiring spouse and does not become part of the community property.

Note that any property acquired before or after the marriage by either spouse is not considered to be community property. Separate property brought into the marriage generally retains its status as separate property during the marriage. The general rule is also that property acquired with separate property funds is separate property. Similarly, property acquired with community funds is normally community property regardless of whether title is taken only in one spouse�s name. Finally, property acquired by a mixture of community and separate property funds is usually treated as if it is partially community property and partially separate property in the same ratio as the mixed funds that were used to acquire the property.

If the marriage ends by either divorce or annulment, the marital community is dissolved and the marital property acquired by the spouses will be divided by the court if the parties cannot reach an amicable agreement between themselves. This division of property will include the community property life insurance policies. The general rule is that the cash value of community property life insurance policies is a community asset and is subject to division between the parties during a divorce.

In non-community-property jurisdictions, divorce does not have an automatic impact on specific items of property such as a life insurance policy. The marital estate will be divided between the parties as they may agree or as a court may direct. Generally, the divorce does not change any beneficiary designations, unless the divorce decree or property settlement agreement so provides. Divorce decrees frequently require one spouse to maintain a life insurance policy for the benefit of the other spouse or the children of the marriage.

Sometimes the spouse will violate the terms of the divorce decree or agreement and designate someone else as the beneficiary of the policy�s proceeds. If this happens, two parties will assert a claim to the death benefits. If the insurer pays the claim of the party appropriately designated by the policyowner without knowledge of the mandate of the divorce decree, the insurer will almost certainly be protected against a later claim from the other party. If the insurer receives both claims prior to making any payment, it is not the insurer�s responsibility to determine who has the better claim. In this circumstance, the insurer will pay the claim to the proper court clerk and file an interpleader action asking the court to determine who is to be paid.

The death of a spouse also terminates the community property relationship. Since the spouses each possessed an undivided one-half interest in the marital estate, the surviving spouse is entitled to one-half of all the community property. While he or she is not entitled to any specific community property asset, the surviving spouse is entitled to receive property equal in value to one-half of the community property. The other half of the community property passes under the deceased spouses�s will or, if there is no will, under the state�s intestacy laws. If the deceased spouse owned any separate property, that property does not automatically pass to the surviving spouse. Just as in a common law state, separate property passes under the deceased�s will or by intestacy.

Death of the spouse in a common law state terminates the marriage, and the property of the deceased spouse passes by will or intestacy. Assets held by the couple in some form of joint ownership (joint tenancy or tenancy by the entireties) pass by operation of law to the surviving tenant, or if held as tenancy in common, pass to the heirs and beneficiaries of the deceased spouse.

Under the English common law it was once said that "in marriage the husband and wife were one; and the husband was that one." That is, of course, no longer the law or the practice. Under the community property law, there was a similar principle that in marriage the husband and wife created a marital community and the husband had the right to manage that community. With only a few exceptions, he did not have to obtain the consent of his wife to use or dispose of the marital property. That, too, is no longer the case although it lasted much longer in the community property legal system than it did under the common law.

The general rule in the community property jurisdictions today is that each spouse has the right and power to manage or dispose of the marital property. This right is not unlimited. For example, one spouse may not make a gift of community property to a third party without the consent of the other spouse. Also a spouse may not act in a manner intended to defraud the other spouse of his or her interest in the community property. These rules have a direct impact on life insurance policies, because they preclude a spouse from designating a third party as the beneficiary of a community property life insurance policy without the consent of the other spouse.

New statutes in the community property jurisdictions impose a high degree of care for each other upon the spouses as they deal with their community property assets. These laws, where enacted, now require each spouse to act as a fiduciary for the other when managing the marital property.

A life insurance policy or its proceeds, like any other asset, may be either community or separate property. In the normal case, the ownership status of an item of property as either community or separate is clearly determined when it is acquired, and that status usually does not change over time. That is not always the case with a life insurance policy. To further complicate the matter, most insurance contracts appear on their face to be the sole property of the owner identified on the policy and the application. The impact of the community property laws is such that a policy that seems to the insurer to be the sole property of one person may actually be the community property of a married couple. If so, a person who is not identified on the policy or the application as an owner is entitled to exercise ownership rights in the policy. Furthermore, a person who is identified as the sole owner on the application and the policy will not be entitled to freely exercise those ownership rights because of the spouse�s community property interest. Finally, a policy that started out as solely separate or community property may over time acquire the characteristics of the other type of property. Let�s examine how the community property laws affect life insurance policies.

If the policy is acquired before the marriage, it is separate property. However, the community property states do not have a uniform rule on whether it remains separate property after the marriage. If, after the marriage, premiums are paid entirely with separate funds, the policy will remain the separate property of the acquiring spouse. In some jurisdictions, the policy will remain the separate property of the acquiring spouse even if the premiums are paid out of community funds after the marriage. In other jurisdictions, as community funds are used to pay the premiums, the policy becomes a mixed community and separate asset in proportion to the ratio of community and separate funds used to purchase the policy.

If a policy is acquired during the marriage but is paid for entirely with separate funds, the general rule is that it will be held as separate property. If it is acquired during the marriage and paid for with community funds, it will normally be the community property of both spouses.

If a policy is the community property of both spouses and one spouse takes an action that transfers that property to a third party, the nontransferring spouse is entitled to recover his or her interest in that property. This principle of community property law can cause difficulties for insurance companies if a community property policy is assigned, its cash values withdrawn, or its beneficiary designation changed without the cooperation of both spouses.

To protect themselves from having to pay policy values twice, insurance contracts contain language such as this excerpt from a provision governing policy assignments: "Any rights created by the assignment will be subject to any payments made or actions taken by (the insurer) before the change is recorded. (The insurer) will not be responsible for the validity of any assignment." The purpose of this language is to permit the insurer to take actions with respect to the policy as directed by the policyowner named in the application. Similar language exists in the provision governing beneficiary changes.

State laws known as exoneration statutes give insurers further protection. These statutes, which are unique to community property jurisdictions, are a necessity to permit policyowners in community property states and insurers to take action efficiently on insurance contracts. Exoneration statutes state that if an insurer pays insurance proceeds or other policy benefits in accordance with the terms of the contract (including the application), the insurer will not be held liable if an unknown party asserts a community property interest in the policy of which the insurer had no prior knowledge. This means that if the recorded owner of a policy in a community property state changes the beneficiary, assigns the policy, obtains a policy loan, or takes any other action with respect to the policy, the insurer is entitled to assume that the owner has the full and complete authority to take the action. Of course, if the insurer has been given actual notice that the policy is the community property of two people, the exoneration statute will provide no protection if the insurer acts on the direction of only the recorded owner. Without the protection of exoneration statutes, insurers would always require both spouses to consent to any action taken with respect to any policy if the insurer thought that there was a possibility of the spouse�s later asserting a community property interest in the policy.

Under the law a general creditor acquires no interest in any specific property of the debtor. This includes life insurance policy values and death benefits. A secured creditor is one who has an interest in a specific piece of property that the creditor may claim if the debt is not paid. Life insurance is a valuable piece of property that may become the security for a loan.

A policy loan is an example of a secured interest. The policyowner is permitted to borrow money from the insurance company in any amount up to a fixed percentage of the policy�s cash value. The policy cash values themselves are not borrowed but serve as the policyowner�s collateral for the loan.

With considerable variation in the law from state to state, life insurance policy values and proceeds receive differing levels of protection from general creditors in the event of the insured�s bankruptcy.

The final circumstance in which a third party may acquire an interest in an insurance policy outside of the terms of the application and contract is when the insured is killed by the named beneficiary. The law is universally clear that a beneficiary who kills the insured will not be permitted to obtain the policy�s death benefits. This prohibition extends beyond the killer to apply also to those who could claim the proceeds through him or her (for example, those who would take the killer�s place under the intestacy laws).

Not every type of killing of the insured by a beneficiary will initiate the exclusion. The general rule is that the killing must be both wrongful and intentional or the beneficiary�s claim will not be denied. Thus the rule would not disqualify a beneficiary who is insane when he or she kills the insured. This is because our legal system assumes that the insane are incapable of forming the necessary intent. Similarly, a killing that is accidental or involuntary will not cause a disqualification if it can be established that the killing was not intentional. A killing in self-defense will not give rise to the exclusion because even though the beneficiary may have intended to kill the insured at the time, such killings are not wrongful.

Although the United States Constitution gives everyone the right to a speedy trial, there can frequently be considerable delay between killing an insured and the ultimate determination of whether the beneficiary is guilty of a wrongful and intentional killing. To effect payment, the insurer will attempt to get a release from the accused beneficiary. If this is not possible, the insurer will normally pay the proceeds to an appropriate court and file an interpleader action asking the court to determine the identity of the proper beneficiary.

If the primary beneficiary is precluded from receiving the proceeds of the policy, the insurer must decide on another recipient. If the policyowner has designated a contingent or secondary beneficiary, the majority rule is that the contingent beneficiary is entitled to the proceeds. Some states have enacted statutes to support this rule of law. These statutes also generally provide that if there is no contingent beneficiary, the proceeds are payable to the insured�s estate or to the insured�s heirs. Case law in a few states ignores the designation of a contingent beneficiary and awards the proceeds to the insured�s estate.