Life Insurance After Divorce: What You Need To Know

Divorce is a major life event that can have a significant impact on your life insurance needs. While it can be an overwhelming process, it is important to review your life insurance policy to ensure that your loved ones are adequately protected. Here are some key considerations:

- Updating beneficiaries: Most couples list their spouse as the primary beneficiary. After a divorce, you may want to change this to your children or other family members. However, if your children are minors, consider creating a trust or appointing a custodian to manage the proceeds.

- Accounting for cash value: If you have a permanent life insurance policy with a cash value component, it may be considered a marital asset and subject to division during the divorce. You can cash out the policy and split the value or negotiate to keep the policy, but you may be required to maintain your spouse as the beneficiary.

- Protecting alimony and child support: If you depend on alimony or child support payments, consider getting a life insurance policy on your former spouse to protect this income. You will likely need their consent, but a court may also order them to obtain coverage.

- Court-ordered life insurance: If your divorce includes alimony, child support, or other financial support, a judge may require you to purchase a life insurance policy as part of the settlement. This is known as court-ordered life insurance.

- Determining coverage and type of policy: Review your life insurance needs based on your financial situation and obligations, such as alimony, child support, or dependent children. Calculate the appropriate amount of coverage and consider the different types of policies available, such as term life or whole life insurance.

Court-ordered life insurance

The court may require one or both parties to purchase a life insurance policy, with the ex-spouse and/or children as beneficiaries. This is especially important if there is a significant income disparity between the ex-spouses or if there are children who are financially dependent on one or both parents. The policy serves as a safety net, providing financial protection for the family.

The type of life insurance and the amount of coverage are typically left to the individual to decide, but the court will set a deadline by which the policy must be active. The policyowner can be either spouse or a third party, such as a custodian or trust. In the case of alimony, the receiving ex-spouse is usually the beneficiary, while in child support cases, the ex-spouse is often the beneficiary unless there are concerns about their ability to use the funds appropriately.

It is important to note that once the obligation end date is reached, the policy does not need to be cancelled. For example, if the court-ordered life insurance was due to child support, the policy can be continued for the benefit of the children even after they reach legal adulthood.

Changing beneficiaries

Changing the beneficiary on your life insurance policy is one of the first things to do when you get divorced. Most married couples make their spouse the primary beneficiary, but after a divorce, you may no longer want your ex-spouse to receive the life insurance payout upon your death.

However, if you have underage children together, you may need to keep your ex-spouse as the beneficiary to ensure your children are financially protected. In this case, you should also consider creating a trust tasked with dividing policy proceeds among your children.

If there are no children involved, and you are not ordered to maintain insurance as part of spousal support, you can change the beneficiary on your policy by contacting the insurance company or your employer’s HR department for policies provided through an employer.

Some life insurance policies have irrevocable beneficiaries, which means that the beneficiary cannot be changed by the policyholder alone. In this case, you would need the agreement of your ex-spouse to remove them as a beneficiary.

If you are ordered to pay spousal or child support, the judge may require you to maintain life insurance with your ex-spouse as the beneficiary to protect these payments. Once your children reach the age of majority, you may file a motion to have the divorce agreement amended.

Protecting alimony and child support

Life insurance is a crucial aspect of divorce settlements, especially when alimony and child support payments are involved. Here are some essential considerations for protecting these payments:

• Securing Child Support with Life Insurance: In the unfortunate event of the paying parent's death, life insurance ensures that child support payments continue. This provides financial security for the surviving parent and the children.
• Naming Beneficiaries: When setting up life insurance, carefully consider who to name as the beneficiary. While naming the child directly may seem straightforward, it can create complications if the child is a minor. Instead, consider designating a custodian under the Uniform Transfers to Minors Act (UTMA) or naming the ex-spouse or the child's other parent as the beneficiary, with the understanding that the funds will be used for the children's support.
• Protecting Alimony: Life insurance can also secure alimony payments in the event of the payor spouse's death. The recipient spouse can receive life insurance proceeds as a substitute for the lost alimony payments, providing crucial financial support.
• Ownership of the Policy: To prevent the payor spouse from changing the beneficiary, the recipient spouse, ex-partner, or a trust for the benefit of the children can own the policy. This gives the owner control over beneficiary designations.
• Vital Provisions in Separation Agreements: Separation agreements should include specific provisions regarding life insurance. This includes requiring the payor spouse to provide annual proof of insurance coverage and stating that any subsequent life insurance policies are intended to benefit the recipients under the agreement.
• Calculating Coverage Amount: When determining the amount of life insurance coverage needed, consider the amount of alimony or child support payments and the number of years they are expected to continue. The coverage amount should be sufficient to secure these payments until the children become financially independent.
• Type of Life Insurance Policy: Term life insurance provides coverage for a specific period, such as 10, 15, or 20 years, and is typically more affordable. Whole life insurance offers permanent coverage until death but is more expensive. Consider your financial situation and the duration of support payments when choosing a policy.

Keeping a policy on an ex-spouse

In most states, you cannot keep a life insurance policy on an ex-spouse because they are no longer considered to have an "insurable interest". However, if there are insurable financial interests—for example, if your ex-spouse is required to make alimony payments—you may be able to maintain a policy if your ex agrees.

Even if you are paying for the policy, your ex-spouse will have to consent to it and will likely be required to sign the application or an affidavit confirming that they understand what is happening. As long as the policy is in their name, they have the right to change beneficiaries or access cash value.

If you have primary custody of your children, it is a good idea to take out a life insurance policy on your ex-spouse with a benefit amount high enough to replace child support or alimony at least until the last child is grown.

If you are the spouse receiving support, one option is for you to own the life insurance policy. This gives you full control over the payments and the naming of beneficiaries. Another option is to have third-party authorizations on the account so you can obtain information if changes are made or be alerted if the policy is about to lapse.

If there are children that depend on your ex-spouse for support, they may be required to take out (and pay for) a life insurance policy.

Reallocation of support

Financial circumstances can change for both parties after a divorce. A reallocation of support may be required if the payor loses their job or the recipient of alimony starts to earn significantly more than the payor. In such cases, the family can go back to court to reallocate support and life insurance obligations. However, handling these matters outside of court is more cost-effective and recommended.

Life insurance needs can also change over time. For example, if a payor is responsible for paying $100,000 in alimony over ten years, they may only need a ten-year $100,000 life insurance policy. If the payor has already paid $50,000 in the first few years of support, they no longer need a $100,000 life insurance policy to protect the compensation. A divorce agreement may permit the payor to step down insurance over time as support is paid. The payor could reduce coverage or add a new beneficiary to receive 50% of the life insurance death benefit. It is important to note that the insurance company will not automatically do this; it is up to the policyholder to make these changes.

Frequently asked questions