Are Disability Insurance Benefits Marital Property in Arizona?

Imagine that you become disabled from your own occupation and the insurer is paying your disability claim. You are entitled to disability benefits until you turn 65, die, or are no longer disabled (according to most policies). What happens to your monthly benefit if your spouse should now leave you?

A recent Minnesota Court of Appeals case addressed the question of whether disability insurance benefits are considered marital property and as such, to be divided among the spouses. During most of Brent and Lori Luginbill’s 23-year-marriage, Brent was employed as a chiropractor. When he became disabled from practicing chiropractic, he applied for and received disability benefits under his employer-provided, own-occupation disability insurance policy. Lori Luginbill petitioned for divorce in August 2007. The question for the court was whether the disability insurance policy and its payments were marital property or income. As marital property, it would be subject to division with the wife receiving a share. As income, it would remain the husband’s income and would not be divided between him and his wife.

The husband argued that because the policy was intended to compensate him for his inability to earn income, the policy’s payments ought to be treated as income. However, because the policy was purchased during the marriage with marital property, the husband became injured during the marriage, and he received the disability insurance funds substituted for earned income during the marriage, the court upheld the classification of the policy’s benefits as marital property.

The court ordered 35% of the benefits to be paid to the wife, with the other 65% remaining the husband’s property. In setting these percentages, the court reasoned that the husband would no longer receive payments if he secured economically beneficial employment, which he had been so far unable to do. The wife, on the other hand, was free to pursue gainful employment without concern for any reduction or discontinuation of the benefits.

What about the dentist or physician who lives in Phoenix, Tucson, or other cities in Arizona? As Arizona is a community property state, the legal analysis differs. The question of whether disability insurance benefits are considered community property was addressed in the case of Hatcher v. Hatcher, a case involving a lump-sum payment received prior to the dissolution of marriage. The Arizona Court of Appeals held that the portion of the payment which represented compensation for the husband’s loss of earning ability was community property, while the portion of the payment which represented compensation for future, post-dissolution lost earning capacity remained the husband’s separate property. Although the facts of each case are different and should be reviewed by an attorney, had the Luginbills lived in Arizona, it is likely that the husband would have retained a complete share of his future disability insurance benefits.

Every claim is unique and the discussion above is only a limited summary of the courts’ rulings in these cases. If you have questions regarding about insurance benefits and dissolution, an experienced Arizona disability insurance attorney can help you assess your claim and determine what action, if any, needs to be taken.


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