BS
Licensed insurance agent
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When it comes to a divorce, there are loads of tasks and details that need to be sorted out on top of any emotional fallout. With all of these issues at play, dealing with life insurance can be overlooked. The couple getting divorced has to divvy up assets, search for a new home, make sure the children are adjusting as smoothly as possible, on top of re-acclimating to life as a single person.
However, dealing with life insurance is an essential part of the divorce process, especially for couples that have children. Keeping life insurance in order protects the financial interests of both parties and any dependents they may have.
It’s much easier to deal with the aspect of life insurance during a divorce when both parties understand that a life insurance policy is the personal property of the owner of the policy. Unless they’re told what to do concerning the policy by the courts, the policy’s owner has the right to do anything they want with the policy.
Owners of life insurance policies can transfer ownership, change beneficiaries, or let the policy lapse from non-payment. Sometimes people think the insured person calls the shots about a life insurance policy, but that’s not the case. It’s the owner of the policy who has the discretionary powers to do what they want with the policy unless the courts have said otherwise.
In general, with a divorce, the changes being made often are in regards to beneficiaries, accounting for the cash value in universal or whole life policies, protecting alimony income and child support, and making certain that any children that are involved are financially protected.
Let’s look at some of the things which will transpire during divorce proceedings in which one or both of the spouses owned a life insurance policy.
There are some types of insurance policies that accumulate cash value, in addition to providing a death benefit to a named beneficiary. This type of policy is usually whole life insurance or universal life insurance. If you’re not sure what type you or your soon-to-be-ex have, get with the agent that sold you the policy or contact the policyholder service department of the insurance company.
Cash value accumulates when a premium payment is made. From that payment, a portion goes to pay for the policy’s death benefit, and a portion goes toward the cash value of the policy (think of it as a savings or investment account).
Over time, the cash value compounding due to interest credited to it can grow to be a substantial amount of money as the years pass, depending upon the size of the death benefit and the premium being paid each month.
The cash value from the policy is part of the owner’s net worth and must be listed as an asset on any financial documents requiring the listing of assets. In many divorce proceedings, assets are divided equally, so both parties will leave the marriage with half the cash value of the policy.
Most married people with life insurance name their spouse as the primary beneficiary of the policy. This means that if the primary (main) beneficiary is deceased when the insured dies, the person named as the secondary beneficiary of the policy will receive the death benefit of the policy.
For example, a spouse usually owns a policy on the other spouse’s life, and vice versa. This is normally because each spouse wants to make sure the other spouse can pay the mortgage, keep food on the table, and raise the children with as little financial disruption as possible.
In the case of a divorce, there’s a good chance that each spouse no longer wants their ex-spouse to receive money as a result of their death. If no children are involved, there are few good reasons for an ex-spouse to remain as a beneficiary.
However, changing beneficiaries before the divorce is finalized can be problematic for the owner of the policy. If there are attorneys involved, they may very well prevent the spouse with custody of the children to be removed as a beneficiary to protect the financial interests of the children, at least until they are no longer minors.
It’s important to know that there are two types of beneficiaries, revocable and irrevocable. If a policy has a revocable beneficiary, the policy owner can change the beneficiary. If the policy has an irrevocable beneficiary, once designated, the beneficiary can’t be changed.
Protecting alimony income or child support, or both, is especially important for the spouse who has primary custody of the children after the divorce. The money decreed by the court to be child support is earmarked toward food and clothing for the kids and saving for college. If the noncustodial parent dies, the income for the surviving spouse is gone and the custodial parent may find themselves in a real bind financially.
The most prudent way for a custodial parent to protect themselves in this case is to maintain a life insurance policy on their ex-spouse with a death benefit large enough to replace both the alimony and child support income, at least until the youngest child graduates from college.
If an ex is unable to make a payment on the insurance policy or is uninterested, the custodial parent may want to own the life insurance policy and pay the premium themselves since life insurance that lapses from non-payment becomes null and void.
One of the biggest challenges of divorce is that it often turns people into single parents. This is particularly challenging for parents that find that they can’t rely on their ex-spouse after the marriage is ended, financially or otherwise.
In some cases, there was no court-ordered disposition of existing life insurance. The ownership of the policies was left intact and the court did not stipulate how long these policies must be left in force and beneficiaries not changed. This can happen in instances where a competent divorce attorney wasn’t used by one or both parties.
What if the ex-spouse can’t be trusted to continue paying premiums on the policy where they are the named insured person and the custodial parent is the beneficiary? In that case, it is in the best interests of the children that the custodial parent buys a life insurance policy with themself as the insured owner and that establish a trust for the children that are the beneficiaries.
How much life insurance they or you may need can be determined by a life insurance agent or financial advisor.
Being prepared to deal with life insurance during a divorce is pretty straightforward. Here are a few tips that can help someone getting divorced make sure that any life insurance policies owned by the couple are factored into any settlement or agreement.
People sometimes aren’t thinking clearly when they are in the beginning stages of getting divorced. If they know where the policies and all other important financial documents are kept, it can help them stay focused on other important matters.
Sometimes an angry spouse can prevent the other spouse from accessing important documents. By having a copy of the life insurance policy, the spouse with restricted access can rest easy knowing that there will be one less confrontation they must endure.
A couple’s financial advisor should be very familiar with the type of life insurance they own and if it has cash value that must be considered as a marital asset. Having the advisor’s contact information handy can lessen the stress during a very difficult time.
People can have many questions about what happens to a life insurance policy when they get divorced. Here are a few of the most frequently asked.
Yes, they can. If they are still the named beneficiary on the policy, the insurance company has a legal obligation to pay the death benefit to the person named as the beneficiary as they had no idea if the policy owner wanted to change beneficiaries.
No, getting a divorce does not automatically change the beneficiary. To change the beneficiary the owner of the policy has to submit a request in writing to the insurance company. The insurance company will then send the owner confirmation that the beneficiary has been changed and confirm who the new beneficiary is.
A divorced spouse can stay on a life insurance policy indefinitely. Unless the owner of the policy submits documentation changing the beneficiary, the ex-spouse will remain as the beneficiary of the policy.
Divorce is one of the most devastating events people experience. Even an amicable divorce can cause financial hardship when the cost of establishing and maintaining two new individual households is considered. Life insurance often tends to be an afterthought.
Couples should make sure they speak with their divorce attorney about any policies they’ve purchased and currently are in-force. A competent attorney will make sure that the policy owners and beneficiaries are structured according to any legal requirements and that their client’s best interests are protected.
