All the following statements concerning the effect of marriage and divorce on the ownership of life insurance are generally correct EXCEPT:

• A. In a common law state, a policyowner's marital status has no direct effect upon the ownership interests in a life insurance policy.
• B. The cash value of a community property life insurance policy is often subject to division between the parties during a divorce.
• C. Under common law, divorce automatically negates the beneficiary designation if a spouse is the named beneficiary of a life insurance policy owned by the other spouse.
• D. Under the community property system, a policy that started out as solely the separate property of one spouse may over time acquire the characteristics of community property.

Answer: (C)

In life insurance, who owns the policy and who benefits from it is shaped by how property is treated in marriage, not by the relationship itself. The rules differ depending on the marital property system, and that drives why certain statements are generally correct while one is not.

In a common law state, the owner of the policy is determined by who holds the ownership rights in the contract. Simply getting married does not automatically change who owns the policy or who has control over premium payments and the policy’s terms. The policy owner can usually name or change beneficiaries, and marital status by itself doesn’t rewrite those ownership rights.

In community property states, assets acquired during the marriage are typically considered community property. A life insurance policy can become a community asset if it’s funded or acquired during the marriage with community funds. The policy’s cash value can be divisible in a divorce, and the policy itself or its proceeds may be distributed between the spouses as part of property division. Over time, a policy that started as separate property can acquire community characteristics if marital funds or contributions alter its status, making the asset partially or fully community property.

The statement about automatic revocation of a spousal beneficiary on divorce in a common law system is not generally correct. Under common law, a divorce does not automatically revoke a beneficiary designation unless a specific law or order applies to revoke it, or the policy owner actively changes the designation. Some jurisdictions have statutes that automatically revoke an ex-spouse as a beneficiary, but that is not universal and not a standard feature of common-law treatment. That’s why this particular statement is the exception.

So, the main idea is that ownership and division are driven by property concepts (common law ownership and community property rules), and a divorce doesn’t universally erase a former spouse as a beneficiary; the other statements align with how ownership and division typically work under these regimes.