Life Insurance: Divorced Parents, Long-Term Kid Security

Life insurance is often overlooked during divorce proceedings, but it is an important consideration for divorcing couples, especially those with children. Sorting out life insurance during a divorce can help protect the financial interests of both parties and their dependent children. This involves making necessary beneficiary changes, accounting for the cash value of the policy, and ensuring that any children involved are financially protected.

Divorcing couples should review their life insurance policies and make any necessary adjustments to reflect their new circumstances. This includes updating beneficiaries, as most people list their spouse as their beneficiary. If there are children, they may be the preferred choice as beneficiaries. However, naming minor children as beneficiaries can result in legal complications and delays in benefit payments. An alternative is to set up a living trust and name it as the beneficiary, with an adult trustee managing and distributing the funds according to the instructions in the trust.

In addition to beneficiary changes, it is important to consider the financial impact of divorce on the policy. If there is a permanent life insurance policy with a cash value component, it may be considered a marital asset and subject to division by the court. Divorcing couples may need to include the cash value in their net worth calculation for the court to consider when dividing marital assets.

Life insurance can also play a role in protecting alimony and child support payments. In some cases, courts may order individuals to purchase a new life insurance policy as part of the divorce settlement, especially if one spouse earns significantly more than the other or when young children are involved. The policy serves as financial protection for the ex-spouse and any minor children who depend on the higher-earning spouse for financial support.

Overall, addressing life insurance during a divorce is crucial to ensure the financial protection of all parties involved, especially any dependent children.

Updating beneficiaries

The first step in updating your beneficiaries is to review your life insurance policy. Determine the amount and type of coverage, the coverage period, and the named beneficiaries. If you have a permanent whole or universal life policy, contact the life insurance company to find out the cash value.

Once you have all the necessary information, you can decide how to update your beneficiaries. If you have children, you may want to name them as beneficiaries. However, if they are minors, this can be complicated. In this case, you can appoint a custodian or create a trust to manage the insurance payouts on their behalf. Alternatively, if your former spouse has custody of the children and the split is amicable, you may want them to have the death benefit.

If you do not have children, you may want to leave the death benefit to other family members or even charities or causes that are important to you.

After you have decided on your new beneficiaries, contact your life insurance agent or company representative to fill out the necessary forms to amend your policy.

It is important to note that beneficiaries cannot be changed after the insured person's death, so it is crucial to keep your policy up to date.

Protecting alimony and child support

Understanding the Importance

If you're divorced and have children, chances are you depend on alimony or child support. If your ex-spouse suddenly passes away, your alimony or child support payments may stop, leaving you with a significant financial burden. Life insurance helps ensure that these payments continue even after your ex-spouse's death. This is especially important if you have primary custody of your children and rely on this income for their upbringing.

Choosing the Right Type of Life Insurance

When selecting a life insurance policy, you have several options, including term life and whole life insurance. Term life insurance covers you for a specific period, usually 10, 15, 20, or 30 years, and is typically more affordable. On the other hand, whole life insurance provides permanent coverage until death and often includes a cash value component, making it more expensive. For most single parents, term life insurance is sufficient, as it covers the children until they become financially independent.

Setting Up the Policy

When setting up the life insurance policy, it's crucial to put your children first. Ensure that they are the ones who will have access to the benefit or that the money is used as intended. One way to do this is by naming a living trust as the beneficiary of the policy. Alternatively, you can designate a custodian under the Uniform Transfers to Minors Act (UTMA) to hold the insurance proceeds for the benefit of the child until they reach a certain age.

Getting Coverage for Your Ex-Spouse

It's important for your ex-spouse to also have life insurance coverage, especially if they are paying alimony or child support. The best method is for them to take out their own policy, with you and your children as beneficiaries. While it's possible for you to buy life insurance for your ex-spouse, they must be aware and consent to it. Additionally, you must prove that you are financially dependent on them, which can be done by showing alimony or child support payments.

Working with Professionals

When navigating life insurance during a divorce, it's advisable to consult with professionals. Speak with a knowledgeable insurance professional who can guide you based on your specific needs. Additionally, consider seeking legal advice from a family law attorney, especially when incorporating life insurance into a divorce settlement or separation agreement. They can help ensure your interests are protected and that all necessary provisions are included.

Choosing the right type of life insurance

Sorting out life insurance is an important part of the divorce process, especially if children are involved. Here are some key considerations for choosing the right type of life insurance in the event of a divorce with kids:

Update Beneficiaries

Most married people with life insurance list their spouse as the primary beneficiary. In the event of a divorce, you will likely want to change this, especially if the divorce is acrimonious. Contact your life insurance agent to verify if your policy is revocable and redesignate your beneficiary. Remember that beneficiaries cannot be changed after the insured person dies, so it is crucial to keep the policy up to date.

Account 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 marital asset and is subject to division during a divorce. Figure out the cash value of the policy and how to divide it. You may be able to cancel the policy and split the cash value or access it in another way.

Protect Alimony and Child Support

If you have primary custody of your children, it is essential to maintain a life insurance policy on your ex-spouse to protect alimony and child support income. The benefit amount should be high enough to replace this income until the children are no longer minors or financially dependent on you. This ensures that your children will still receive financial support even if your ex-spouse passes away.

Duration of Coverage

Discuss the duration of obligatory life insurance coverage with your insurance agent. This will depend on factors such as the length of court-ordered alimony and/or child support. Term life insurance policies are typically used to meet these temporary financial obligations.

Payment of Premiums

Decide who will be responsible for paying the life insurance premiums. This could be included in the divorce agreement to ensure compliance. Alternatively, you can request duplicate copies of billing and lapse notices to monitor payment status. Failure to pay premiums may result in the cancellation of the policy.

When choosing the right type of life insurance during a divorce with kids, it is important to seek legal and financial advice to ensure that your children's financial interests are protected.

Accounting for cash value in a permanent policy

If you have a permanent life insurance policy with a cash value component, it may be considered a marital asset and subject to division by the court like all your other marital property. In some cases, you and your ex may be able to cancel the policy and split the cash value or access it in another way.

Each month when you make your premium payment, a portion of that money enters a fund that grows with interest. The balance of this fund is the policy's cash value. At any point while the policy is active, you may elect to forgo the death benefit and instead take the cash value. This process is known as cashing out your life insurance policy.

The cash value from a life insurance policy represents part of your net worth as a couple. The most equitable thing to do is to list the life insurance policy, including its cash value, among the marital assets to be divided. In a divorce in which assets are divided evenly, this means each spouse leaves the marriage with half the cash value from the policy.

If you have a permanent whole or universal life policy, contact the life insurance company to determine how much cash value has accumulated. Then, consider the following:

• If you have minor children, you'll want to take their support into account regardless of what the courts mandate after your divorce. These concerns are even more pressing if there's a significant income disparity between you and your ex and you share custody of minor children.
• If you have custody of your children, the most prudent way to protect yourself 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 at least until the last child is grown.
• If you get primary custody of your children, and your ex isn't living up to the terms of the divorce settlement, you may want your own insurance policy because life insurance becomes null and void when the payments lapse.
• If divorce makes you a single parent, you need to take out adequate life insurance on yourself to protect your children or other dependents.
• If you have a permanent life insurance policy, the cash value in it builds up as a result of the fixed premiums you pay in being split into three categories. One portion of your premium goes toward the death benefit, another part is channelled toward the insurer's costs and profits, and the third increases the policy's cash value.
• Different kinds of whole life policies carry varying levels of risk when it comes to cash value accumulation. If you obtain a whole life policy, it usually poses the least risk with guaranteed cash value accumulation. Variable life policies are more risky because they depend on the performance of an asset but may produce greater cash value over time.
• Cash value life insurance is more expensive than term life insurance.
• Unlike term life insurance, cash value insurance policies don't expire after a specific number of years.
• You may borrow against a cash value life insurance policy.
• You may also withdraw cash from the policy, but this will reduce the death benefit.

Ensuring children are financially protected

Divorce is a major life event, and it is important to ensure that children are financially protected during and after the divorce process. Here are some steps to help ensure that children are taken care of:

• Determine how much coverage you need: Calculate the financial situation of your ex-spouse, including alimony and/or child support payments. This will help you understand how much coverage is needed to maintain the same standard of living for your children.
• Read the divorce agreement carefully: Life insurance policies are often used as security for alimony and child support payments. Ensure that the agreement meets your needs and that you can comply with it. Divorce agreements are legally binding and difficult to alter, so it is important to understand the financial implications.
• Discuss the duration of coverage: The timeframe for obligatory life insurance coverage varies, often depending on the length of court-ordered alimony and/or child support. These are typically temporary needs, and a term policy can help meet the financial obligations of raising your children.
• Decide who will pay the premiums: Having your ex-spouse pay the insurance premiums can be convenient, but if you are concerned about the possibility of default, consider having the payment responsibility written into the divorce agreement. Alternatively, you can request to be added to the policy record to receive duplicate copies of billing and lapse notices.
• Re-designate beneficiaries: Depending on the divorce settlement, you may need to rename the beneficiaries of the life insurance policy. If there are minor children involved, consider appointing an adult custodian or trust to receive and manage the benefits on their behalf. Be specific about when and how much each child will receive. It is important to keep the policy up to date, as beneficiaries cannot be changed after the insured's death.
• Get a quote for term life insurance: Term life insurance is typically less expensive and can provide coverage for a specific period. However, these policies do not build cash value, and your beneficiaries will not receive any funds after the term ends.
• Create a trust: Consider setting up a trust to manage the proceeds of the life insurance policy. This can help ensure that the funds are used for the health, education, maintenance, and support of your children.
• Protect alimony and child support: If you have custody of your children, maintaining a life insurance policy on your ex-spouse can protect these income streams. Choose a benefit amount high enough to replace your child support or alimony income until your children are financially independent.
• Update your will: Designate a guardian for your children in your will. This will ensure that someone you trust is appointed to care for your children in the event of your death.
• Seek professional help: Consult a divorce attorney, financial advisor, or mediator to help you navigate the financial aspects of the divorce and ensure that your children's interests are protected.

Remember, the most important thing is to ensure that your children's financial needs are met and that they are provided for in the event of any unforeseen circumstances.

Frequently asked questions