Life Insurance And Divorce: What To Know

Goldberg Jones Divorce, Finances Leave a Comment

Divorce is complicated. When you’re married, you make decisions together, like combining bank accounts and taking out joint loans. You bind yourself together financially and make plans for the future. When divorce happens, you have to untangle yourself from the intricate web created by combining two lives. Life insurance policies can be one of the more delicate knots to untie and oftentimes get overlooked in divorce.

Dealing with life insurance during a divorce can be emotional especially when you have children. These policies may form a safety net for families. It’s important to hit all the key aspects and make the most logical decisions for all parties involved.

The Necessary Aspects That Need to Cover Are:

  • Beneficiary changes.
  • Accounting for the cash value in whole or universal life policies.
  • Protecting child support and alimony income.

Beneficiary Changes

One reason life insurance is overlooked so often in divorce is that the dissolution of a marriage does not automatically remove you or your ex from the policy.

If your ex-spouse took out a life insurance policy that insures you and pays out a benefit in the event of your death, they can keep that policy even after your divorce. Only the policyholder can cancel or change the life insurance policy.

The exception to this is if you receive the insurance policy and benefits as part of the divorce agreement.

The good news is that most life insurance policies are revocable. This means the policy owner may change the beneficiary at any time. There are instances where you can’t change the beneficiary at all, which is called an irrevocable beneficiary. In these cases, once that person has been named, it can’t be altered.

If you’re the policyholder, the easiest way to change your policy is to simply call your insurance agent, have them verify the policy, and then re-designate your beneficiary. 

Related Reading: How to Save Money on Divorce

Accounting for the Cash Value

As you make plans to become financially independent from your spouse, you look to divide assets and debts, evaluate bonds, stocks, and mutual funds, and consider retirement. While you do this, keep in mind, courts don’t technically consider life insurance a financial asset. Only the cash value is assessed.

The cash value from a life insurance policy represents part of your net worth. Listing the life insurance policy, including its cash value, among the marital assets to be divided is the most equitable thing to do. This is mostly due to the fact that in a common divorce where assets are divided evenly, you leave the marriage with half the cash value from the policy.

If you have a term life policy, you don’t have to worry about splitting the policy up as an asset during the divorce. Term policies do not come with any supplemental components and have no cash value. Permanent policies, however, are sometimes seen as an investment due to their tax-deferred savings. Talking to your life insurance provider can help you identify which type of policy you have and clarify the differences with each.

Related Reading: Rebuilding Finances Post-Divorce

Protecting Child Support and Alimony Income

For the spouse awarded primary custody of the children after a divorce, protecting child support and alimony income is especially important. The money from child support and alimony is essential to maintaining the well-being of any kids involved.

One way to protect yourself from the absence of such supplemental income is by maintaining a life insurance policy on your ex-spouse, at least until your child leaves for college. With a benefit amount high enough to replace your child support or alimony income, it can serve as a financial safety net.

This isn’t a particularly common strategy, occasionally the court does order a parent to agree to a life insurance policy.  Usually, however, that’s not the case.

If you’re in a situation where the other parent is unable or unwilling to make continued payments toward the life insurance, you have options. One option is to own the policy and pay the premium yourself as life insurance becomes null and void if the payments lapse.

Court-Ordered Life Insurance

In the instance that you are required to pay court-ordered life insurance there are three things to consider:

  • The application for life insurance policies can take at least 4-6 weeks to complete. If you are rejected and required to submit additional information, it takes even longer. This means that the sooner you are able to get started with the process, the better. 
  • Communication is key to making this as smooth as possible from the very beginning. Talk with your lawyer and your former spouse about who owns the policy, how long the term should be, how much the coverage you need, and who pays the premiums.
  • Proof of a purchased life insurance policy may be asked of you. In this case, you should be able to get a copy of your signed application from the broker.

As with many things during a divorce, dealing with life insurance often gets complicated. It can be a useful tool for providing for your children, but it’s also not all that common. Negotiating it as part of a settlement also adds additional costs to your case.

Still, it’s a question to consider. If you have questions about how it impacts your case, it’s usually best to consult a divorce attorney. That should give you a solid idea of how to proceed.

Related Reading: Your Ex Ran Up Debt Behind Your Back

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