Life Insurance Cash Value: Divorce-Proof Or Not?

Life insurance is often overlooked during divorce proceedings, but it is an important part of the process, especially when children are involved. The cash value of a life insurance policy is considered a joint asset and can be split between the two parties. Term life insurance is often considered a separate asset, but the cash value in a permanent policy may be considered joint. Divorcees should also consider changing their beneficiaries, especially if their spouse was previously listed as the primary beneficiary.

Term life insurance is often shielded from divorce proceedings

Term life insurance policies are usually shielded from divorce proceedings. This is because term life insurance policies do not accumulate cash value and are therefore not considered joint assets. However, permanent life insurance policies with a cash value component are often considered financial assets in divorce proceedings.

During a divorce, it is important to review and update your life insurance beneficiaries and make any necessary changes to your policy. This is especially true if you have children or if there is a significant income disparity between you and your ex-spouse. You may also need to buy a new policy to ensure your loved ones are adequately protected.

Beneficiary Updates

It is common for married couples to list their spouse as the primary beneficiary on their life insurance policy. However, after a divorce, you may want to remove your ex-spouse as the beneficiary and assign a new one, such as a parent, sibling, or a trust. If you have children, you may also consider naming them as beneficiaries, but this can be complicated if they are minors. In such cases, you may need to appoint a trustee or custodian to control the funds.

Policy Ownership

If your ex-spouse owns a life insurance policy that insures you and pays out a death benefit to them, they can typically keep that policy even after the divorce. To make any changes to the policy, you would need to obtain ownership of it through the divorce settlement or request that your ex-spouse makes the desired changes.

Alimony and Child Support

If you will be receiving alimony or child support payments after the divorce, consider purchasing a life insurance policy on your ex-spouse to protect this income. The benefit amount should be high enough to replace the expected alimony or child support payments until your children are financially independent.

Financial Considerations

Term life insurance policies are generally more affordable than permanent life insurance policies. They provide coverage for a specific period, such as 10, 15, or 20 years, and do not build cash value. This makes them a good option for individuals who want maximum coverage while working within a budget. However, it is important to note that term life insurance policies will not pay out any funds to beneficiaries if the insured person dies after the term has ended.

Cash value in permanent life insurance may be considered joint

In a divorce, the cash value from a life insurance policy represents part of the couple's net worth and is typically considered a joint asset to be divided. This means that each spouse would receive half of the cash value from the policy. However, it is important to note that splitting a whole life policy with its associated cash surrender value is generally considered a taxable event, unless the policy is being split due to a marriage or common-law relationship breakdown.

In some cases, one of the partners may want to take over the joint policy in return for financial consideration. This may be a more financially prudent option, as purchasing a new policy to replace the coverage will likely be more expensive. However, in this case, the new policy owner would be responsible for making the premium payments.

It is also important to note that the treatment of cash value in permanent life insurance during a divorce may vary depending on the specific circumstances and the laws of the state or country in which the divorce is taking place. It is always advisable to consult with a financial advisor or lawyer to navigate these complex issues.

Beneficiaries should be updated after divorce

When going through a divorce, it is important to update your beneficiary designations. While you may be eager to remove your spouse as a beneficiary, it is illegal to do so in the middle of divorce proceedings. Each state has its own laws regarding what can and cannot be done once divorce papers are filed. For example, in Massachusetts, an automatic financial restraining order goes into effect upon filing for divorce, prohibiting changes to life insurance or IRA beneficiaries.

It is advisable to consult a divorce lawyer to understand the specific laws in your state and to ensure you are complying with them. Changing beneficiaries prematurely could be seen as an attempt to punish your spouse financially and could negatively impact your negotiations and custody case. Additionally, if you have children, they may be listed as alternate beneficiaries, and changing designations could affect them.

Once the divorce is finalized, you can change your beneficiary designations as long as they adhere to the settlement agreement. If you have children or are ordered to pay spousal support, you may need to keep your ex-spouse as a beneficiary on specific accounts or policies, such as life insurance, to ensure financial protection for your children and stability for your ex-spouse.

To change beneficiaries, contact your insurance company, retirement fund administrator, and bank or brokerage firm to request a change of beneficiary form. If policies or funds are managed through your employer, contact your HR department. Fill out and return the forms promptly and follow up to ensure the changes have been made. Some companies may also require a hard copy of the beneficiary designation.

It is important to act quickly once the divorce is finalized to avoid any unintended consequences, such as your ex-spouse receiving life insurance proceeds or retirement account balances in the event of your death. Regularly reviewing and updating beneficiary designations is crucial, especially if you remarry or have other significant life changes.

Cash value from a life insurance policy is a marital asset

When it comes to divorce, life insurance can be a tricky topic. The type of life insurance policy, the beneficiaries named, and the terms of the divorce will all impact the coverage going forward. One of the critical considerations in a divorce is how to divide financial assets, such as marital assets like the family home, joint savings, emergency funds, and investments, which are typically split evenly between the spouses.

The cash value from a life insurance policy is indeed considered a marital asset during divorce proceedings and is often subject to division by the court. This is true for permanent or whole life insurance policies, which accumulate cash value over time. Each premium payment contributes a portion to a fund that grows with interest, and this fund's balance is the policy's cash value. This cash value is accessible while the policyholder is still alive and can be withdrawn, with the policy then being cancelled.

In the context of divorce, the cash value from a life insurance policy represents part of the couple's net worth and is typically divided equally, with each spouse receiving half the cash value. This process can be as simple as withdrawing the cash and splitting it, or the court may allow the policy to be maintained, but with the former spouse remaining as a beneficiary.

It is important to note that term life insurance policies, which only provide a death benefit and do not accumulate cash value, are generally not considered marital assets and are usually shielded from the divorce process.

Dividing the cash value of a life insurance policy during a divorce can be a complex process, and it is always advisable to seek guidance from a financial advisor or lawyer to navigate these proceedings effectively.

A court may mandate a life insurance policy with an ex-spouse as a beneficiary

A court may order an individual to purchase a life insurance policy as part of a divorce settlement. This is usually done to ensure financial protection for the ex-spouse and any minor children who are financially dependent on the higher-earning spouse. While the court can mandate the purchase of a life insurance policy, the type of policy and the amount of coverage are typically left to the individual to decide.

In the case of permanent life insurance policies, the cash value component may be considered a marital asset and subject to division by the court. This means that the cash value will be included with other marital assets and divided between the spouses. If the policy has a significant cash value, it is essential to discuss it during the settlement.

It is important to note that the requirements for life insurance in a divorce settlement can vary depending on the state and the specific circumstances of the case. Some states have "revocation-upon-divorce" laws, which automatically remove the ex-spouse as a beneficiary on life insurance policies. However, this may not apply if the policy is governed by federal laws or if there is a divorce decree that requires the ex-spouse to be maintained as the beneficiary.

Additionally, the process of separating life insurance coverage can depend on the type of policy held. If both spouses hold individual term life insurance policies, they can usually continue with their coverage independently after the divorce. On the other hand, if there is a joint first-to-die life insurance policy, the spouses may need to assign the coverage to one partner or split it into separate policies.

Overall, it is crucial to consult with a financial advisor or lawyer when navigating the complexities of life insurance during a divorce to ensure that all necessary considerations are made and the best interests of any children involved are protected.

Frequently asked questions