Going through a divorce can be stressful, devastating and extremely difficult. While divorce can be a long road that involves substantial planning and effort, it is important to remember to consider your entire financial portfolio to ensure everything has been accounted for. During divorce, Life insurance policies can be easily glossed over but remember that your life insurance policy protects your assets and in some cases has an actual cash value. After your divorce, you might need to modify your current life insurance plan or get quotes for new coverage. Of course, this depends on your situation, but it is best to inform and prepare yourself early on in the process.
Life Insurance As A Marital Asset (Cash Value)
There are two main types of life insurance policies, term life and cash value policies. Term life insurance policies cease at the end of a given period of time without the option of early cash withdrawal, which is why they are usually less expensive than cash value policies. If you have a cash value policy, such as a whole life, variable life or universal life insurance policy, this could be considered a marital asset. Since cash value policies can accumulate over time and can also be withdrawn early without using the death benefit, you will want to account for this asset during divorce proceedings. The court will consider a cash value policy as part of you and your spouse’s net worth and determine the best course of action to potentially split the policy.
Changing The Policy’s Beneficiary
If you followed the traditional route, you most likely have your spouse listed as a beneficiary on your life insurance policy to financially protect them and your potential children in the case of an untimely death. Having a life insurance policy guarantees financial stability for your spouse in the sense that they would be able to continue paying financial obligations such as the mortgage, credit cards, and the costs associated with children. Depending on the individual salaries of each spouse, having a life insurance policy is particularly important in a marriage where there is one primary breadwinner.
In a divorce, you may no longer want to keep your ex-spouse as the beneficiary of your policy. If you are the policy owner, the majority of life insurance policies allow you to change the beneficiary at any point in time. However, there are certain situations when changing the beneficiary is not an option. For example, there is a possibility that you named your ex-spouse as an irrevocable beneficiary. This means that the beneficiary cannot be changed without their consent. If there are no children in the relationship, there is little reason to allow your ex-spouse to receive a payout if you were to pass. However, in a relationship with children involved, the court could determine that the owner of the policy must keep their ex-spouse listed as the beneficiary.
Who Is The Policy Owner?
One Person
Depending on the type of policy, you have options to change and designate a different beneficiary. If you are the sole owner of the policy, you are usually able to change the beneficiary at any point in time (without any obligation to tell your ex-spouse) unless there are unique circumstances such as having an irrevocable beneficiary or a court order. For example, if the court decides that it is necessary for you to maintain the life insurance policy to protect your spouse from loss of income or to guarantee uninterrupted child support payments, you might be obligated to keep your ex-spouse as the beneficiary for a given amount of time.
It’s A Joint Policy
Some couples have a joint life insurance policy, meaning the couple pays a single premium to cover each spouse. There are different options to consider if you and your ex-partner have a joint policy. Depending on when you obtained the initial policy, you and your ex-spouse could keep the policy and continue to make payments on the premium. If you decide to take this route, set up a legal arrangement to ensure that timely payments will be made so you aren’t stuck paying for the entire policy on your own.
Another option is for either you or your ex-spouse to individually hold the policy in one name. This means that if you decide to keep the policy in your name, your ex would be removed from the policy and have to purchase their own if they desire. This might not be favorable for your ex-partner unless there was a solution to account for the premiums that they had paid up until that point because they won’t reap the benefits from the policy once their name is removed.
Lastly, you and your partner could cancel the policy all together and find individual policies that work best for each of you individually. While at the face value this might seem like the simplest option, remember that if the joint policy was purchased when you and your spouse were much younger and potentially healthier, you might end up paying more for the premium because once you purchase a new policy, they will take into consideration age and have you update your medical exam.
While Separated
If you and your partner are separated and have not yet begun divorce proceedings, remember that you are still able to change the beneficiary of your policy at any point time unless as discussed earlier, there are extenuating circumstances that do not allow for this.
During Divorce
During a divorce, understanding how each spouse’s life insurance policy will be determined is an important part of the proceedings. As previously discussed, in many circumstances the individual can change the beneficiary of their policy without an issue but in the case where there is a court order to maintain the policy, the situation becomes a bit more complicated.
For example, if there are child support payments and alimony that will need to be maintained, the judge could decide to uphold the spouse as the beneficiary as part of the divorce decree.
Additionally, if the spouse does not have a life insurance policy at all, they may order the spouse who has financial obligations to the other spouse to obtain a life insurance policy.
If the court orders you to obtain a life insurance policy, remember not to procrastinate as securing a policy can take some time and research. For example, you will need to provide medical history, take a medical exam and answer various questions. You will want to consult with your lawyer to determine the terms for the policy. To set up the policy to allow for your ex-spouse to receive the benefit payout, you can either name them as an irrevocable beneficiary or set up the policy listing your ex-spouse as the owner.
Child Support/Alimony
Life Insurance To Guarantee Child Support
If child support or alimony are going to be part of the divorce settlement, you or your spouse’s life insurance policy will be taken into account. Alimony allows the spouse to maintain the life that they were accustomed to before the divorce whereas child support allocates funds to be used for necessary child care expenses. The court will determine a divorce settlement (including alimony and child support payments) based on the wages of the spouses prior to the divorce.
This means that if there is a situation where either you or your spouse were making substantially more income than the other and children are involved, the court will take this into consideration when determining what to do about life insurance policies. For example, if you financially depend on your ex-spouse even after the divorce for child support payments, the court could potentially allow you to remain the beneficiary of an existing policy or order your ex-spouse to obtain a new policy to provide guaranteed support for the future.
The court might decide to set a time limit on how long you are able to remain the beneficiary based on the amount of time child support and alimony payments are due (usually when children turn 18 or 21). This varies state by state because there are different sets of rules regarding alimony geographically so it is important to check with your attorney on the exact terms.
Taking Out A Life Insurance Policy On Your Ex
There are some situations where extra precautions are necessary to guarantee future financial stability for your family. For example, if your spouse is unreliable, you may want to take out a life insurance policy on them. This is an optional route to take if they will owe you child support or alimony and you want to ensure that these payments continue if they unexpectedly pass.
Life Insurance For Single Parents
If you are a single parent with little to no contact with your ex, it is important to understand the best ways to protect your children in an unexpected event. As a single parent, you are most likely the sole provider financially and even emotionally for your children. If something were to happen to you, would your children be adequately protected?
To give your children the best possible outcome in an unthinkable situation, it could be beneficial to look into an individual life insurance policy for yourself. Term life insurance, which ends after a certain amount of time, could be your best option because it is usually less costly than a cash value policy and can pay for your final expenses, recurring debts you may have and still support your children’s financial needs in the future. Even if your ex-spouse is in the picture, purchasing a term life policy for yourself might be the best route to take if they are financially unreliable.
