Keeping Life Insurance On An Ex-Spouse: Is It Possible?

Life insurance is often overlooked during divorce proceedings, but it's an important aspect of securing your financial future. While you typically can't keep life insurance on your ex-wife, there are some circumstances in which you may be able to. Here's what you need to know about life insurance and divorce.

Court-ordered life insurance

Understanding the Need for Court-Ordered Life Insurance

In a divorce, the court may order one or both parties to obtain life insurance to secure financial protection for the ex-spouse and any dependent children. This is especially important if there is a significant income disparity between the spouses and shared custody of minor children.

Types of Life Insurance Policies

When it comes to court-ordered life insurance, the two most common types of policies are term life insurance and whole life insurance. Term life insurance provides coverage for a specific period, often 10, 15, 20, or 30 years, and is generally more affordable. On the other hand, whole life insurance offers permanent coverage for life and has the added advantage of cash value, which can be accessed during the policyholder's lifetime.

Determining the Coverage Amount

The amount of coverage needed for court-ordered life insurance should be based on financial obligations such as alimony, child support, and the number of dependent children. It is recommended to calculate the coverage amount by multiplying the annual income by the number of years until the youngest child reaches the age of majority or financial independence.

Beneficiary Designation

In most cases, the ex-spouse (custodial parent) is designated as the beneficiary of the court-ordered life insurance policy. However, if there is an amicable relationship, some individuals may choose to name their children as beneficiaries. If the children are minors, consider creating a trust to manage the distribution of policy proceeds among them.

Legal and Financial Considerations

It is crucial to seek legal advice when dealing with court-ordered life insurance to ensure compliance with state laws and the specific requirements of the court order. Additionally, individuals should be aware of possible pitfalls, such as the ability of the policyowner to change beneficiaries or cancel the policy.

Timely Application and Proof of Policy

It is important to start the life insurance application process as early as possible, as it can take up to six weeks or longer. Communicate with your ex-spouse and respective lawyers about the policy details, including the term length, coverage amount, policy ownership, and premium payments. Obtain proof of the policy, such as a signed application or receipt of payment, to provide to the court.

Changing beneficiaries

Removing your former spouse as a beneficiary

Most married couples with life insurance name their spouse as the policy's primary beneficiary. However, after a divorce, you may not want your former spouse to benefit from your death. In such cases, you can remove them as a beneficiary. The divorce laws of 23 states in the US automatically revoke a person's beneficiary status upon divorce, which necessitates naming a new beneficiary.

Deciding on a new beneficiary

If you remove your former spouse, you must name a new beneficiary or multiple beneficiaries. This could be a new partner or spouse, your adult children, a trust, other friends or relatives, or even a charity.

Designating a custodian

If you have children, you may want to list them as the beneficiaries of your life insurance policy. However, this can get complicated if your children are minors. In most states, a person must be 18 or older to receive a life insurance death benefit. To avoid court-appointed guardians deciding how to administer the life insurance proceeds, you can designate a custodian to control insurance payouts while acting in your children's best interests.

Creating a life insurance trust

Another option is to create a life insurance trust, a legal entity that holds assets for the benefit of other people or entities. A life insurance trust can distribute insurance benefits to your children based on your preferences.

Retaining your former spouse as the primary beneficiary

If you remain on good terms with your ex-spouse and they have custody of the children, or you both have shared custody, it may be easiest to retain them as the primary beneficiary.

Alimony and child support obligations

If you have primary custody of the children and your former spouse is supposed to pay alimony or child support, the court may require you to keep your former spouse as the beneficiary on your life insurance policy. This ensures that alimony and child support payments continue in the event of your death.

Buying a new policy

You may also voluntarily purchase a new policy to protect your children or dependents if the divorce results in you becoming a single parent.

Child support and alimony

Divorce can be a tricky time, and it's important to ensure that you, your ex-spouse, and your children are financially protected. Sorting out life insurance is an important part of the divorce process, especially if there are children involved. Here are some things to consider regarding child support and alimony:

Beneficiary Updates:

In most cases, married people with life insurance list their spouse as the primary beneficiary. After a divorce, you will likely want to change this, especially if the divorce was acrimonious. Most life insurance policies are revocable, meaning you can change the beneficiary at any time. Contact your insurance agent to verify if your policy is revocable and to redesignate your beneficiary.

Accounting for Cash Value:

Some life insurance policies, such as whole life and universal life policies, accumulate cash value over time. This cash value is considered a joint asset and should be divided as part of the divorce settlement. You can cash out the policy and split the proceeds with your ex-spouse, or use the cash value to offset other assets.

Protecting Alimony and Child Support:

If you have primary custody of your children and receive alimony or child support, it is important to protect this income stream. The best way to do this is to maintain a life insurance policy on your ex-spouse with a benefit amount high enough to replace your child support or alimony income until your children are financially independent. This ensures that you will still receive this financial support even if your ex-spouse passes away.

Life Insurance for Single Parents:

If you become a single parent after the divorce, it is crucial to have adequate life insurance to protect your children financially. Calculate how many years you have until your youngest child turns 18 or 21 and multiply this by your annual income to determine the minimum benefit amount needed.

Court-Ordered Life Insurance:

If your divorce decree includes child support, alimony, or other financial support, a judge may require you or your ex-spouse to obtain a life insurance policy with the other person as the beneficiary. This ensures that the financial support continues even in the event of death.

Remember, it is always best to consult with a legal or financial advisor to understand your specific situation and make informed decisions regarding life insurance during and after a divorce.

Cash value of the policy

If you have a permanent whole or universal life insurance policy, it will have a cash value that has accumulated over time. This cash value is a tax-advantaged asset that can be tapped into during your lifetime.

In the event of a divorce, the cash value of a life insurance policy may be considered a marital asset and subject to division by the court, just like any other marital property. If you and your ex-spouse decide to cancel the policy, you can split the cash value or access it in another way. Contact your insurance company to find out what your options are.

If you have primary custody of your children and are receiving child support or alimony, you may want to maintain a life insurance policy on your ex-spouse. This will ensure that you continue to receive this financial support, even if they pass away. The benefit amount should be high enough to replace your child support or alimony income until your youngest child is grown.

If you are the one paying child support or alimony, your ex-spouse may want to take out a life insurance policy on you. To do this, they will need to prove that they have an insurable interest, meaning that they would experience financial hardship if they stopped receiving income from you. They will also need your consent, as the policy is being taken out in your name.

If you are going through a divorce, it is important to review your life insurance policy and make any necessary changes to ensure that it reflects your new circumstances.

Insurable interest

In the context of life insurance, "insurable interest" refers to the financial or other types of benefits that a person receives from another person's continued existence. In other words, if the insured person were to pass away, the surviving person would experience a financial loss or hardship. This concept is important because it ensures that life insurance is used properly and prevents fraud.

In most states, you cannot keep life insurance on an ex-spouse because they are no longer considered to have an insurable interest. However, there are some situations where you may be allowed to maintain a policy if your ex-spouse agrees. For example, if there are insurable financial interests, such as alimony payments, you may be able to keep the policy. Additionally, if there are children involved, a court may order one or both parties to purchase a life insurance policy as part of the overall divorce settlement. This is done to provide financial protection for the ex-spouse and any minor children who depend on the higher-earning spouse for support.

To prove insurable interest, the policy owner must provide proof when applying for the policy and when the insured person passes away. The insurance company will typically investigate the relationship between the policy owner, beneficiary, and insured person to determine if there is a valid insurable interest. If an insurable interest is not found, the policy application may be denied, or the death benefit may not be paid.

It is important to note that while insurable interest is a requirement when the policy is first secured, beneficiaries can be changed, and ownership can be transferred once the policy is established. Additionally, the consent of the insured person is required to purchase a life insurance policy on them, even if the insurable interest is clear.

Frequently asked questions