Divorce And Life Insurance: Changing Beneficiaries After Separation

Divorce is a stressful and complicated process that involves untangling shared assets and accounts. While it may be tempting to immediately remove your spouse as a beneficiary from your life insurance policy, it is important to carefully consider the legal and personal implications of doing so. Seeking advice from a lawyer or financial advisor is crucial before making any changes.

In some cases, you may be required by law or court order to maintain your spouse as the beneficiary, especially if you owe alimony or child support. On the other hand, if there are no children involved and no financial support obligations, there are typically few reasons to keep your ex-spouse as the beneficiary.

Divorce can have a significant impact on life insurance policies, and it is essential to review and update beneficiaries, as well as purchase additional policies if needed, to ensure that your loved ones are adequately protected after the divorce.

Removing an ex-spouse as a beneficiary

If you want to remove your ex-spouse as a beneficiary from your life insurance policy, the first step is to consult a divorce lawyer. They will be able to advise you on the specific rules and considerations that apply in your situation. The ability to remove your ex-spouse as a beneficiary depends on the terms of your divorce, and there may be legal implications to making this change.

If you are the policyholder and you are not required to provide ongoing financial support to your ex-spouse post-divorce (e.g. through alimony or child support payments), you will likely be able to remove them as a beneficiary. However, if you do have ongoing financial obligations to your ex-spouse, a judge may require you to keep them as a beneficiary to ensure this support continues in the event of your death.

If you are permitted to remove your ex-spouse as a beneficiary, you will need to decide on a new beneficiary or beneficiaries. This could be a new partner or spouse, adult children, a trust, other friends or relatives, or even a charity.

It is important to note that some life insurance policies are established with irrevocable beneficiaries, who cannot be changed by the policyholder alone. In such cases, the ex-spouse would retain the right to a payout upon the policyholder's death, even after a divorce, unless they agree to changes in the policy.

To make any changes to your life insurance policy, you will need to contact the insurance company directly or, if the policy is provided through an employer, your HR department.

Changing beneficiaries without consulting a lawyer

Changing the beneficiary on a life insurance policy is a straightforward process that can be done at any time. However, there are a few circumstances in which changing beneficiaries without legal counsel may be inadvisable.

Policy Ownership

First, it is important to determine who owns the policy. Only the policyholder can change the beneficiary designation. If you are the policyholder, you can change the beneficiary at any time, even during a divorce, by contacting your insurance company. However, there are certain restrictions to this. If you put your spouse as the beneficiary during divorce proceedings, they will be automatically revoked as a beneficiary once the marriage is formally dissolved. Check your state laws to understand the specifics of your situation.

Community Property States

If you live in a community property state and bought your policy after you got married, you will need your spouse's permission to name someone other than them as your beneficiary. Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Irrevocable Beneficiaries

If you have named an irrevocable beneficiary, you will need their approval to remove them from your policy. Irrevocable beneficiaries are rare but may be named as part of a prenuptial agreement.

Divorce and Children

Divorce can impact your life insurance policy, particularly if you have children. If you owe alimony or child support, a judge may require you to keep your ex-spouse as a beneficiary so that financial support continues if you pass away.

Death of Beneficiary

If you never change your beneficiary and they die before you, your life insurance proceeds will go to a contingent beneficiary or your estate. Once the payout becomes part of your estate, a court will decide who gets the money.

Other Considerations

While changing beneficiaries is generally a simple process, it is important to review your policy regularly and consider adjusting your coverage after major life events. Additionally, it is recommended to have a will in place to ensure your wishes are carried out. While a will does not override a life insurance policy, it can help guide the distribution of your assets.

Court-ordered life insurance

Application Process

The life insurance application process can be lengthy, so it is advisable to start as early as possible, ideally six months in advance. Communicate with your former spouse and respective lawyers about the policy details, including the term length, coverage amount, policy owner, and premium payments.

Meeting the Court's Deadline

The judge will usually assign a deadline for activating the policy, so it is important to meet this deadline by showing proof of the obtained life insurance to the court.

Policy Ownership and Beneficiaries

To ensure that your former spouse receives the benefit, you can either make them the owner and beneficiary of the policy or name them as an irrevocable beneficiary if you are the policy owner.

Legal and Financial Implications

Consulting a legal or financial advisor is crucial before making any changes to your life insurance policy after a divorce. Removing your former spouse as a beneficiary or cancelling the policy may have legal and personal implications, especially if you are required to provide alimony or child support.

Life Insurance as a Marital Asset

Whether a life insurance policy is considered a marital asset depends on its type. Permanent life insurance policies with a cash value component are often considered joint assets, while term life insurance policies, which have no cash value, are generally not treated as marital assets.

Protecting Child Support Payments

If you receive child support payments following a divorce, you may want to consider getting life insurance on your former spouse to protect this income stream in the event of their death.

Impact on Dependents

If you have children or other dependents, you may need to purchase a new life insurance policy or adjust your existing one to ensure their financial protection.

Common Mistakes to Avoid

There are several mistakes to avoid when dealing with court-ordered life insurance during a divorce. These include ignoring the court-ordered mandate, purchasing the wrong type or amount of coverage, not seeking legal advice, and not updating existing policies.

Life insurance as a marital asset

Whether or not a life insurance policy is considered a marital asset depends on the type of policy and the laws of the state in which the divorce is taking place. Term life insurance policies, which do not accrue cash value, are generally not considered marital assets. On the other hand, permanent life insurance policies, such as whole life and universal life insurance, which do have a cash value component, are often considered joint assets.

In community property states, life insurance is considered a marital asset if the premiums were paid with income earned during the marriage. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In a divorce, the cash value of a permanent life insurance policy is considered a financial asset and may be divided between spouses. The policy can be cashed out and the proceeds divided, or the policy can be left intact, and the non-insured spouse can be compensated through other marital assets. The court's decision will depend on whether the marital assets are subject to equal or equitable distribution, which varies by state.

In contrast, term life insurance policies do not accrue value, and thus, there is no cash value to be divided as an asset. However, the beneficiary of a term life insurance policy may still be impacted by the divorce. About half of the states in the US have "revocation-upon-divorce" statutes that automatically remove an ex-spouse as a beneficiary when the divorce is finalised. If the divorced policyholder wishes to keep their ex-spouse as a beneficiary or is required to do so by the court, they must follow the state law procedure for renaming them.

Federal law also plays a role in certain cases. For example, group insurance policies, such as employer-paid term life insurance, military service members' policies, and federal employee plans are typically treated differently in cases of divorce due to the Employee Retirement Income Security Act. In these cases, an ex-spouse is usually entitled to the life insurance money derived from these policies.

Protecting child support payments

Child support is a crucial aspect of divorce proceedings, ensuring the financial security of children involved. Here are some measures to protect and ensure timely child support payments:

• Formal Child Support Order: A formal child support order is typically established as part of the divorce process, outlining the payment structure and schedule. This order is legally binding and can be enforced by the courts.
• Wage Garnishment: Wage garnishment involves deducting child support payments directly from the paying spouse's paycheck. This ensures timely payments and reduces the risk of non-compliance.
• State Child Support Agency: Utilizing a state child support agency is another effective method. These agencies assist in collecting and disbursing payments, relieving the receiving spouse of administrative tasks and potential conflicts with the paying spouse.
• Life Insurance Policy: Obtaining a life insurance policy on the paying spouse can safeguard child support payments in the event of their untimely death. This ensures that the children continue to receive financial support as intended.
• Court Intervention: In cases of non-payment or disputes, the courts can intervene and enforce the child support order. They have various methods to compel compliance, including wage garnishment, property seizure, or legal repercussions.
• Modification Requests: If the paying spouse experiences significant life changes, such as job loss or illness, they can petition the court to modify the payment amount or schedule. This prevents non-payment and ensures payments remain feasible.
• Custodial Agreements: Understanding the difference between custodial and non-custodial parents is essential. The non-custodial parent, who does not have daily care responsibilities, is typically ordered to make child support payments based on their income and the time spent with the child.
• State Guidelines: Each state has its own guidelines and formulas for calculating child support amounts, taking into account factors such as parental income, expenses, and custody arrangements. Familiarize yourself with the laws in your state to ensure accurate calculations.
• Temporary Support: During the divorce process, temporary child support orders can be sought to ensure the immediate financial needs of the children are met. These orders are often based on custody schedules, the number of children, and the income of both spouses.
• Record-Keeping: Maintaining detailed records of all child support payments is crucial. This helps in tracking payments, identifying any discrepancies, and providing evidence in case of disputes or legal proceedings.

Frequently asked questions