Life Insurance And Divorce: Who Benefits And When?

Life insurance is often overlooked during divorce proceedings, but it's an important consideration, especially when children are involved. While term life insurance is usually considered a separate asset, the cash value in a permanent policy may be treated as joint. Divorce agreements may also require ex-spouses to take out life insurance coverage, especially if there are children or financial obligations like alimony or child support. In some cases, ex-spouses may want to keep a policy on their former partner, but this can be challenging as most states don't view them as having an insurable interest. Ultimately, the decision to keep or remove an ex-spouse as a beneficiary depends on various factors, including the type of policy, state laws, and the relationship between the divorced individuals.

Court-ordered life insurance

During divorce proceedings, a court may require one or both parties to purchase a life insurance policy, typically to provide financial protection for the ex-spouse and any minor children who are financially dependent on the higher-earning spouse. This ensures that alimony or child support payments continue in the event of the paying spouse's death. The policyowner can be either spouse or a third party, such as a custodian or trust.

The court will usually specify the required amount of life insurance coverage and how long the policy should be maintained. For child support, the policy is typically required until all children reach the age of maturity (18 or 21, depending on the state). For alimony, the coverage should last as long as alimony payments are required.

It is important to note that the type of life insurance policy and the amount of coverage to be purchased are typically left to the individual to decide. Whole life and term life insurance policies are popular options, with whole life providing permanent coverage and the ability to build cash value, while term life insurance is less expensive but limited to a specific period.

In some cases, the court may also require adjustments to an existing life insurance policy to reflect the individual's new circumstances following a divorce. This includes updating beneficiaries and accounting for any cash value in a permanent policy, which may be considered a marital asset subject to division.

Alimony and child support

Protecting Alimony and Child Support with Life Insurance

During divorce proceedings, the court may order the paying spouse to maintain a life insurance policy, naming the receiving spouse as the beneficiary. This arrangement ensures that in the event of the paying spouse's death, the life insurance payout will cover the total alimony and child support obligations. This is especially important if the receiving spouse has primary custody of the children and relies heavily on these payments for their financial stability.

Determining the Coverage Amount

When deciding on the coverage amount, it is recommended to calculate the payments until the youngest child reaches the age of majority (18 or 21) and multiples it by the annual alimony and child support amount. This ensures that the receiving spouse has sufficient funds to support the children until they become legal adults.

Choosing the Right Type of Life Insurance

There are two main types of life insurance policies to consider: term life insurance and permanent life insurance (including whole life insurance). Term life insurance is typically more affordable and provides coverage for a specific period, such as 10, 15, or 20 years. On the other hand, permanent life insurance offers lifelong coverage and accumulates cash value over time, which can be accessed by the policyholder.

Considerations for the Receiving Spouse

If you are the receiving spouse, it is essential to review your life insurance policy and make any necessary changes. You may need to update the beneficiaries, especially if you no longer want your ex-spouse to profit from your death. Additionally, if you have primary custody of the children, consider maintaining a policy on your ex-spouse to ensure continued financial support in the event of their death.

Considerations for the Paying Spouse

If you are the paying spouse, it is crucial to understand the legal requirements and consent needed to purchase a life insurance policy on your ex-spouse. Most states require proof of insurable interest, which means you must demonstrate financial dependence on your ex-spouse, such as relying on their alimony or child support payments. Additionally, your ex-spouse's consent is typically required, and they may need to sign the application and undergo underwriting.

Insurable interest

Examples of Insurable Interest

• Spouses and former spouses: Spouses always have an insurable interest in each other as they depend on each other financially and emotionally. Even after a divorce, an ex-spouse may have an insurable interest if there are financial obligations, such as alimony or child support.
• Children and grandchildren: Parents often have a financial dependency on their children and may suffer financial loss upon their death, making them insurable.
• Special needs adult children: Parents of special needs adult children may have an insurable interest due to ongoing financial obligations and potential future expenses.
• Employers: Under specific arrangements, employers may have an insurable interest in their employees, especially high-level or key executives, as their death could impact the company's performance.
• Business partners: Each partner in a business venture has an insurable interest in the other partners since their death could put the business at risk.
• Creditors and debtors: A creditor has an insurable interest in a debtor because they may not recover their loan if the debtor passes away.

Proving Insurable Interest

When purchasing a life insurance policy, the beneficiary-owner must prove their insurable interest in the insured person. This is typically done through legal documentation, such as birth certificates, marriage certificates, court orders, or other relevant contracts. The insurer may also conduct a phone interview to inquire about the relationship and insurable interest.

It is important to note that even with an insurable interest, the insured person's consent is usually required to purchase a life insurance policy on their life. This is to ensure transparency and address any moral and societal concerns. However, there are exceptions, such as a parent buying coverage for a minor child.

Policy ownership

The ownership of a life insurance policy can be a complex issue in the event of a divorce. While some states automatically remove the spouse as a beneficiary following a divorce, others require the policy owner to request the change. In any case, a new beneficiary will need to be named, which is typically one or more children.

In some states, it is possible to keep a policy on an ex-spouse after divorce, but most courts in the US won't allow this as the divorced person is no longer considered to have an "insurable interest". This means that they would not suffer a financial hardship if their ex-spouse passed away. However, if there are insurable financial interests, such as alimony or child support payments, it may be possible to maintain a policy if the ex-spouse agrees.

In the case of whole life insurance policies, which include a cash value component, the policy may be considered a marital asset and subject to division by the court. In such cases, the ex-spouses may cancel the policy and split the cash value, or access it in another way.

If there are dependent children involved, the court may order the higher-earning spouse to obtain life insurance to protect future child support payments. This ensures that the family will have financial support in the event of the earning spouse's death.

When it comes to updating beneficiaries, most married couples have their spouse as the primary beneficiary. After a divorce, the former spouse may be automatically removed as the beneficiary, or the policy owner may need to request the change. In either case, a new beneficiary must be named, and this is typically one or more children.

In some cases, if the divorce is amicable, the ex-spouse may be kept as the beneficiary, especially if they have custody of the children.

Beneficiaries

In most cases, the spouse is the primary beneficiary of a marriage partner's life insurance plan. This ensures that the insured person's income is used to support the spouse and any dependents, even after their death. However, after a divorce, the policy owner may not want their ex-spouse to remain the beneficiary.

Some states in the US automatically remove the spouse as a beneficiary following a divorce. In other states, the policy owner must request the change. Regardless, a new beneficiary will need to be named, which is a simple process. Typically, a parent will choose one or more children as the new beneficiary/beneficiaries.

It is important to change the beneficiary as soon as possible. If the insured person dies before the change is made, the payout will go to the listed beneficiary, even if the policy owner would have preferred the money to go to someone else.

In amicable divorces, some spouses might keep their ex-partner as a life insurance beneficiary. This is especially likely if the ex-spouse retains custody of the children.

The type of life insurance policy also affects beneficiary designations. Term life insurance is often considered a separate asset, and the policy owner generally retains it after a divorce. Whole life insurance, on the other hand, may include cash value, which is considered a joint financial asset and will be divided between the ex-spouses by the court.

Divorce agreements may also mandate that an ex-spouse takes out life insurance coverage, especially if there are children involved. This ensures that alimony and child support payments continue in the event of the paying spouse's death.

In cases where the paying spouse is the owner of a term life insurance policy, they may choose to remove their ex-spouse as a beneficiary and select a new one. Options include a new partner or spouse, adult children, a trust, other friends or relatives, or even a charity.

If the divorced couple has children, they may be listed as beneficiaries. However, this can be complicated, especially if the children are minors. In most states, a person must be 18 or older to receive a life insurance death benefit. To overcome this, the policy owner can designate a custodian or create a life insurance trust to control insurance payouts while acting in the children's best interests. Alternatively, if the ex-spouses share custody and are on good terms, the ex-spouse can be retained as the primary beneficiary.

Overall, the decision to keep an ex-spouse as a beneficiary or remove them and select a new beneficiary depends on various factors, including the nature of the divorce, the presence of children, and the type of life insurance policy.

Frequently asked questions