Divorce gets 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 go overlooked in the divorce process.
Dealing with life insurance during a divorce can be emotional especially when you have kids. These policies 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.
Aspects You Need to Cover Include:
- Beneficiary changes.
- Accounting for the cash value in whole or universal life policies.
- Protecting child support and alimony income.
Beneficiary Changes
The dissolution of marriage doesn’t automatically remove you or your ex from a policy. This is one reason people so often overlook life insurance in divorce.
If your ex took out a life insurance policy that insures you and pays out a benefit in the event of your death, they keep that policy even after your divorce. Only the policyholder has the ability to cancel or change that contract.
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. That’s called an irrevocable beneficiary. In these cases, once that person has been named, no one can alter the document.
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.
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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. They only assess the cash value.
This number 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 term life insurance, you don’t have to worry about splitting the policy up as an asset. 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 should help you identify which type of policy you have and clarify the differences between each.
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Protecting Child Support and Alimony Income
For the spouse awarded primary custody of the children after a divorce, protecting child support and alimony income becomes especially important. The money from child support and alimony is essential to maintaining the well-being of your kids.
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, this serves as a financial safety net.
This isn’t a particularly common strategy, but occasionally the court does order a parent to submit to this plan. 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.
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Court-Ordered Life Insurance
In the instance that the court requires you to pay life insurance there are three things to consider:
- The application for life insurance policies often takes at least 4-6 weeks to complete. It takes even longer if you are rejected and required to submit additional information. This means that the sooner you start 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 coverage you need, and who pays the premiums.
- The court often asks for proof of a purchased life insurance policy. 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 valuable 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 and complications to your case.
Still, it’s an option 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 best to proceed.
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