Life Insurance And Divorce: Who Gets What?

Divorce is a difficult process, and there are many things to consider, including life insurance. While it may be tempting to cancel or cash out your policy, it is important to carefully review your life insurance policy after a divorce to ensure your children and ex-spouse are protected.

Term life insurance policies are usually considered separate assets and are not split during a divorce. However, the cash value in a permanent life insurance policy may be considered joint and can be divided.

Divorce decrees may also require one or both parties to purchase a new life insurance policy, especially if there are children involved, to ensure financial protection for the ex-spouse and any minor children who are dependent on the higher-earning spouse.

Updating beneficiaries

If there are no children involved, and there is no court order to maintain insurance as part of spousal support, the beneficiary can be changed by contacting the insurance company or the employer's HR department for policies provided through an employer. Some policies have irrevocable beneficiaries, which means the policyholder cannot change the beneficiary without their agreement.

If the divorce is amicable and the ex-spouse has custody of the children, the death benefit can be left to them. Otherwise, the death benefit can be left to other relatives or even charities or causes that are important to the policyholder. If children are the intended beneficiaries, it is best to create a trust tasked with dividing the proceeds among them, as there can be complications if they are minors.

In some states, there are "revocation-upon-divorce" laws that automatically remove an ex-spouse as a beneficiary, but this does not apply to group insurance policies, which are governed by Federal ERISA statutes.

Accounting for cash value in a permanent policy

When it comes to divorce, term life insurance is often considered a separate asset, while the cash value in a permanent policy may be considered joint. This is because the cash value in a permanent life insurance policy represents part of the couple's net worth.

In the case of a divorce, the most equitable thing to do is to list the life insurance policy, including its cash value, among the marital assets to be divided. This means that in a divorce where assets are split evenly, each spouse will receive half of the cash value from the policy.

To determine the cash value of the policy, contact the life insurance company to find out how much cash value has accumulated over time. Each month, when a premium payment is made, a portion of that money goes into a fund that grows with interest, and the balance of this fund is the policy's cash value.

It's important to note that the laws regarding life insurance and divorce may vary depending on the state. In some states, the cash value from a policy may be used by a spouse as part of their share of marital assets, while in other states, it may not be considered part of the division at all. Therefore, it is crucial to understand the specific laws in your state before making any decisions.

Additionally, there may be tax implications associated with the cash value portion of a policy, which can vary depending on factors such as the policy type, the amount of cash value, and individual tax circumstances. As such, it is highly recommended to consult with a financial advisor or accountant to understand the specific tax implications before making any decisions.

Protecting alimony and child support

If you're divorced, you and your child may depend on alimony or child support. If your ex-spouse suddenly dies, the payments will stop. This can be life-changing, leaving you scrambling to maintain your finances. Life insurance helps ensure that alimony or child support continues even after your ex-spouse passes away.

Including life insurance as part of a divorce settlement starts with buying your own life insurance. You must make sure you are covered since you are now the caretaker of your children and their main monetary provider. If you die unexpectedly, your children will continue to need financial support.

Your children are the main reason you bought your life insurance policy. This means that both the plan you buy and the way it's set up must put your children first. You need to ensure they are the ones with access to the benefit or that the person responsible for the money can only use it as you intended. Simply put, you must make sure your children are the only ones who will be able to utilize the money left to them from the life insurance policy.

It's equally important for your ex-spouse to have life insurance. Chances are they are paying some sort of alimony or child support, so it's essential this financial support continues even if they die. The best method is for the ex-spouse to take out the life insurance policy themselves, including you and the children as beneficiaries. However, it's also possible for you to buy life insurance on your ex-spouse, but they must know and be okay with it.

It's important to note that both single mothers and single fathers can benefit from life insurance to protect alimony and child support. The same rules apply no matter the specific scenario.

The right company for you depends on your own needs and preferences. You should start by deciding between whole life and term life coverage. Term life is your best option if you only want life insurance coverage until your child is old enough to live on their own. It's usually available in 10-year, 20-year, and 30-year terms. Whole life is more permanent and lasts until you die, but it's more expensive. However, most single parents don't need whole life coverage.

Keeping a policy on an ex-spouse

Keeping a life insurance policy on an ex-spouse is a complex issue that depends on several factors, including state laws, the type of policy, and the presence of children. Here are some key considerations regarding keeping a policy on an ex-spouse after a divorce:

Insurable Interest

In most states, an individual cannot keep a life insurance policy on an ex-spouse because they are no longer considered to have an "insurable interest". This means that the divorced person does not have a valid reason to financially benefit from the death of their former spouse. However, there may be exceptions if there are insurable financial interests, such as ongoing alimony or child support payments. In such cases, maintaining a policy on an ex-spouse may be allowed if the ex-spouse agrees.

Court-Mandated Coverage

In some cases, a court may order one or both parties to purchase a life insurance policy as part of the divorce settlement, especially if there are minor children involved. This is usually done to ensure financial protection for the ex-spouse and the children who depend on the higher-earning spouse's financial support. While the court may mandate the purchase of a policy, the type of life insurance and the amount of coverage is typically left to the individual to decide.

Policy Ownership and Cooperation

Even in states where it is not prohibited, keeping a life insurance policy on an ex-spouse requires their cooperation. As long as the policy is in the ex-spouse's name, they have the right to change beneficiaries or access any cash value associated with the policy, even if the other party is paying the premiums. Therefore, it is crucial to have the ex-spouse's agreement and cooperation to maintain the policy.

Beneficiary Considerations

If there are children involved, the decision to keep a policy on an ex-spouse may be influenced by custody arrangements and the relationship between the former spouses. If the ex-spouse has custody of the children and the split is amicable, the policyholder may wish for them to receive the death benefit. In such cases, creating a trust to manage the distribution of the policy proceeds among the children can be a viable option.

Cash Value Policies

If the life insurance policy has a cash value, it may be considered a marital asset and subject to division by the court. In such cases, the policy can be terminated, and the cash value can be split between the former spouses. Alternatively, they may be able to access the cash value in other ways, such as cashing out the policy and dividing the proceeds.

Protecting Alimony and Child Support

Maintaining a life insurance policy on an ex-spouse can be a way to protect alimony and child support payments. If the policyholder is receiving these payments, a policy on the ex-spouse can provide financial security in the event of their death. However, it is important to ensure that the death benefit is sufficient to cover the lost income until any minor children become adults.

Court-ordered life insurance

The owner of a court-ordered life insurance policy can be either spouse or a third party, such as a custodian or trust. The owner has control over the policy and is responsible for paying the premiums. The beneficiary of the policy is typically the ex-spouse receiving alimony or child support.

• Review policy requirements: Carefully review the court's instructions regarding the type of coverage, coverage amount, policy duration, and any specific conditions.
• Designate beneficiaries: Comply with the court's order and name the appropriate beneficiary or beneficiaries as specified.
• Consider the purchase timeline: The court will usually provide a deadline by which you must show proof of purchasing the required policy. It is important to start the application process well in advance to allow for potential delays.
• Seek legal advice: Consult with your divorce lawyer early and often to understand how life insurance should be addressed in your specific settlement.

Frequently asked questions