Life Insurance: Separation Impact And Your Coverage

When a married couple decides to part ways, there are many difficult decisions to be made, including what happens to their insurance policies. In this paragraph, we will explore the complexities of life insurance in the context of legal separation and provide insights into the options available for individuals in this situation. Understanding these options is crucial for individuals seeking to protect their interests and those of their loved ones during this challenging transition.

The beneficiary of your life insurance policy

When married couples separate, they often have to make many difficult decisions, especially if they have children. One concern that couples often discuss with divorce attorneys is whether their estranged spouse can stay on their insurance after a divorce, or if the spouse benefits from their insurance.

If you have a life insurance policy, you may need to modify the beneficiary designation after separation—especially if you don't have children. You may need to keep your spouse as a beneficiary to secure support obligations, but there aren't many reasons to keep your ex-spouse as a beneficiary of your life insurance policy. If you don't remove your former spouse as a beneficiary, they can get benefits even though you are no longer together. This can cause upset for loved ones who survive you and tie up your estate in litigation.

To modify your life insurance policy's beneficiary, you will need to fill out and submit a Change of Beneficiary form to your life insurance provider. You may want to name your children as beneficiaries, but if they are minors, that can be complicated. Consider creating a trust tasked with dividing policy proceeds among your children. On the other hand, if your soon-to-be ex-spouse has custody of the children and the split is relatively amicable, you may wish them to have the death benefit. If no children are involved, think about whether you want to leave the death benefit to other relatives. Or, consider making beneficiary designations to charities or causes you care about—the cash payout doesn't have to go to a person.

In some cases, you may want to pay to keep a spouse's policy in effect (or get a new one) even if the court doesn't mandate coverage. This is a problem in many states that assume you don't have an "insurable interest" in your ex-spouse. However, even in situations where it's not prohibited (because, for example, you have an interest in your ex-spouse's ability to provide support), you will need your ex-spouse's cooperation: as long as the policy is in their name, they have the right to change beneficiaries or access cash value, even if you're paying the premiums.

Division of assets

When a married couple decides to part ways, they must make several difficult decisions, especially if they have children. One concern that often arises is whether a spouse can remain on their partner's insurance policy after a divorce. If the couple separates amicably, both spouses can remain on the same insurance policy if they choose legal separation instead of finalizing a divorce.

In some jurisdictions, couples typically separate before getting divorced. They can commit to keeping their partners and children on their employee benefits or health insurance coverage by way of a separation agreement, either before or after their divorce becomes final. However, some employee benefit plans will not allow a non-spouse to be covered. In such cases, having a divorce finalized can limit a spouse's health and dental coverage more than a separation.

If you have a life insurance policy, you may need to make adjustments to the beneficiary designation, especially if you do not have children. You may need to keep your spouse as the beneficiary to secure support obligations. Otherwise, there are not many reasons to keep your ex-spouse as a beneficiary. If you don't remove your former spouse as a beneficiary, they can get the benefits even after your separation. This can cause upset for surviving loved ones and tie up your estate in litigation.

The property regime under BC's Family Law Act entitles each spouse to half of all property owned by at least one spouse at the time of separation. Therefore, a life insurance policy purchased during the marriage could be considered family property and subject to division on divorce. For example, the cash value of a life insurance policy built up over the course of the marriage is treated as family property. Not all insurance policies have a cash surrender value. If your insurance policy has an accrued cash value, options for dealing with the policy on divorce may include cashing out the policy and splitting the proceeds or keeping the policy intact but negotiating a settlement that includes its cash value.

Retirement assets may be the biggest financial asset in a marriage. It is important to carefully divide these assets. Income typically drops for partners following a divorce, especially for women.

Support payments

When it comes to support payments, life insurance can play a crucial role in ensuring that alimony and child support obligations are met even after the death of the paying spouse. Here are some key considerations regarding support payments and life insurance when legally separated:

Court-Ordered Life Insurance

In divorce or separation cases involving alimony or child support payments, courts often require the paying spouse to obtain life insurance as part of the settlement. This ensures that the receiving spouse and any minor children continue to receive financial support in the event of the paying spouse's death. The type of life insurance and coverage amount may be left to the paying spouse to decide, but it should be sufficient to cover their support obligations.

Beneficiary Considerations

If you are the paying spouse, you may be required by the court to keep your ex-spouse as the beneficiary of your life insurance policy, especially if you are providing alimony or child support. This ensures that your ex-spouse continues to receive financial support from the policy's death benefit. However, if there are no children involved and the relationship is acrimonious, you may want to remove your ex-spouse as the beneficiary.

Policy Ownership

In some cases, the receiving spouse may want to maintain control over the paying spouse's life insurance policy by becoming the policy owner. This gives them the right to make changes to the policy, such as naming beneficiaries, and ensures that the policy remains active as long as premiums are paid. This can be especially important if the paying spouse is unreliable or there is concern about their ability to maintain the policy.

Cash Value Policies

If you have a permanent life insurance policy with a cash value component, this may be considered a marital asset and subject to division during the separation or divorce. You may need to cash out the policy and split the value with your ex-spouse, or the court may order another form of division. It's important to review the specifics of your policy and consult with a financial professional to understand your options.

Protecting Child Support

If you have minor children and are concerned about their financial support, you may want to consider purchasing a term life insurance policy on your ex-spouse, especially if there is a significant income disparity between you. This will provide peace of mind and ensure that child support payments continue even if your ex-spouse passes away.

Court-mandated life insurance

If you already have a life insurance policy, you may need to make adjustments to reflect your new circumstances. For example, you may need to change the beneficiary, especially if you don't have children, as there are few reasons to keep your ex-spouse as a beneficiary. If you have a permanent whole or universal life policy, you should contact your insurance company to determine the cash value, as this may be considered a marital asset and subject to division by the court.

In some cases, the court may order you to execute a new life insurance policy or continue your existing policy to ensure that child support and spousal support payments are insured for a set period. This is particularly common when there is a significant income disparity between the ex-spouses and they share custody of minor children.

It is important to note that the laws regarding life insurance and divorce vary from state to state, so it is always best to consult with a legal professional to understand your specific rights and obligations.

Permanent policies with cash value

Permanent life insurance policies such as whole life and universal life can accumulate cash value over time. This cash value is a savings component that the policyholder can use for several purposes, including borrowing or withdrawing cash from it, or using it to pay policy premiums.

The cash value of life insurance earns interest, and taxes are deferred on the accumulated earnings. While premiums are paid and interest accrues, the cash value builds over time. As the life insurance cash value increases, the insurance company's risk decreases, as the accumulated cash value offsets part of the insurer's liability.

Partial Withdrawals

If the money is not repaid, withdrawals will reduce the life insurance death benefit—the payment to the beneficiary when the policyholder dies. Partial surrenders or withdrawals are usually permissible, although these may reduce the death benefit. Some policies allow for unlimited withdrawals, while others restrict the number of withdrawals per term or calendar year.

Borrowing Against the Cash Value

You can take out loans for anything you like, but you will have to repay them, with interest. If you don't, the insurer will subtract the outstanding loan amount from the death benefit. Most cash value life insurance arrangements allow for policy loans from the cash value.

Surrendering the Policy

If you withdraw all the cash value and surrender the policy, this will end the life insurance coverage. In the early years of the policy, you will likely have to pay a surrender fee to the insurance company.

Paying Premiums or the Cost of Insurance

Once the cash value reaches a high enough level, you might be able to use the cash value to pay whole life insurance policy premiums. For other permanent policies, you can use the cash value to cover the cost of maintaining your policy.

It's important to note that it can take years to build up enough cash value to start accessing the money within your policy. Additionally, permanent life insurance policies with cash value tend to have higher premiums than term life insurance policies.

Frequently asked questions