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Insurer Views Policy as Community Property

Q: I have a large insurance policy with a major insurer. The policy, which is in my name alone, stipulates clearly that I have the “sole right” to change the beneficiary. Recently I applied to change the policy’s primary beneficiary from my wife to our family trust, in which my wife is the co-trustee with me. The company refuses to make the change unless my wife signs a notarized “release of community property interest.” What happened to my right to change the beneficiary as I please? --W. E. R.

A: Quite simply, your right to change the beneficiary has bumped into the community property laws of California as interpreted by your insurance company.

Under your company’s conservative interpretation, life insurance policies purchased in community property states are considered community property, regardless of which spouse’s name is on the policy and what the policy says about his or her “sole right” to change the name of the beneficiary. So unless you can prove that your policy was purchased with funds separate from your community assets, your wife is required to sign a “release of community property interest” when you change the beneficiary on your policy--even though, obviously, the change you are proposing does not materially alter her control of the policy’s proceeds upon your death.

Why would your insurance company take this position? Well, think about it. What if you and your wife were in the middle of a messy divorce and you wanted to substitute your girlfriend for your children on your life insurance policy? Don’t you think that your wife might object? Don’t you think that she might sue the insurance company that had failed to notify her of your beneficiary substitution? Your insurance company is simply looking out for your wife’s interests--as well as its own--when it required that she sign the release.

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By the way, not all insurance companies selling policies in California and other community property states take this position. Some, such as Pacific Mutual in Newport Beach, will issue policies to one spouse without considering whether the policies are purchased with community funds or not. These same companies will also allow a change in beneficiary without the consent of the other spouse.

Readers, ever mindful that nearly one of every two marriages ends in divorce, may want to check their policies and the transfer of beneficiary rules maintained by their insurance companies to understand fully where they stand in case the unthinkable happens.

Q: I live on the interest from my invested assets, about half of which are in Ginnie Mae mutual funds operated by two separate, nationally known brokerages of fine repute. I am not interested in seeing my investment grow as much as I am in income security and receiving a fair return. My broker says Ginnie Maes are just the investment for me. What do your experts say? Have I placed too many eggs in one basket? --R. D. W.

A: Our financial planning counselors say Government National Mortgage Assn. securities--better known as Ginnie Maes--are a fine choice for you. And they say you were especially wise to purchase these securities through a mutual fund with a strong track record. However, there are a few points we should cover about these securities, as well as an investment strategy that you might want to pursue in tandem with your Ginnie Mae position.

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As you no doubt know, Ginnie Mae securities are invested in mortgages issued by the nation’s thrifts to homeowners like you and me. These mortgages are collected in large pools, given the backing of the “full faith and credit” of the U.S. government and then resold to investors either directly or through mutual funds. On the average, these bonds yield returns from 1% to 2% higher than U.S. Treasury notes and bonds, and repayment of principal and interest is guaranteed by the government, as it is with Treasury securities.

But although the government guarantees timely repayment of the mortgages, plus their specified interest rate, it does not guarantee that the yield of Ginnie Mae investments will remain constant. Nor does it promise that the price of the basic bond--or the bond mutual fund--will remain unchanged. Why? Like most bonds, Ginnie Maes are affected by changes in the interest rate--and not only when rates rise. Bond prices can drop as well, typically after interest rates decline and homeowners rush to refinance their home mortgages. As the older loans are repaid, mortgage bonds are retired and bond fund managers are forced to reinvest the proceeds in mortgages paying the now lower prevailing rates.

What does all this mean to your investment strategy? Our financial planners say it means that investors in Ginnie Maes should hedge their bets by diversifying their portfolios to include investments whose yields more closely track fluctuations in interest rates. Because security is of primary importance to you, you may want to consider investing in short-term Treasury securities or certificates of deposit that allow you to move your money as rates change.


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