Understanding Divorce Decree Life Insurance Basics

Divorce is a challenging process that requires numerous changes in one's daily life and can be emotionally exhausting. An important aspect that is sometimes overlooked is life insurance, which can have a significant impact on the financial well-being of those involved, especially children and other dependents. During a divorce, the court may order one or both parties to purchase a life insurance policy as part of the overall settlement, typically to provide financial protection for the ex-spouse and any minor children who depend on the higher-earning spouse for support. This type of court-ordered life insurance is becoming increasingly common, and it's important to understand how it works and what options are available.

Court-ordered life insurance

The requirement for life insurance can be imposed on one or both parties in the divorce. The policy type and amount of coverage are typically left to the individual to decide, but the court may set a deadline by which the policy must be active. The divorce decree may also specify who will pay the premiums.

The need for court-ordered life insurance arises from the financial obligations outlined in the divorce settlement, such as child support and alimony. The life insurance policy ensures that these financial obligations can be met even in the event of the policyholder's death.

For example, if the higher-earning spouse is required to pay alimony or child support, the court may order them to obtain life insurance with their ex-spouse as the beneficiary. This ensures that the financial needs of the surviving ex-spouse and dependent children continue to be met.

In some cases, the court may also order the maintenance of an existing life insurance policy, with minor children designated as beneficiaries, as part of a child support order. This is particularly relevant in situations where there is a significant income disparity between the spouses.

It is important to note that the specifics of court-ordered life insurance can vary depending on state laws and individual circumstances. Consulting with a divorce lawyer is essential to understanding the specific requirements and implications of life insurance in a divorce settlement.

Changing beneficiaries

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, which prohibits either party from changing life insurance beneficiaries. In other states, there may be revocation-upon-divorce laws that automatically remove an ex-spouse as a beneficiary. Therefore, it is crucial to understand the specific laws in your state before making any changes.

If you are required to pay alimony or child support, your divorce decree may require you to keep your ex-spouse as a beneficiary on your life insurance policy. This is to ensure that they continue to receive financial support in the event of your death. However, if you are the policyholder and will not be financially supporting your ex-spouse after the divorce, you may be able to remove them as a beneficiary.

It is also important to consider the impact of any changes on your children. If you have minor children, you may want to name them as beneficiaries. However, most states prohibit minors from accepting life insurance death benefits. In this case, you can appoint a custodian and create a trust to manage the death benefit payout. Alternatively, if your soon-to-be ex-spouse has custody of the children and the split is amicable, you may wish for them to have the death benefit.

Overall, while it may be tempting to remove your spouse as a beneficiary during a divorce, it is crucial to consult a lawyer and consider the financial implications for all parties involved, especially any children, before making any changes to your life insurance policy.

Cash value of life insurance policies

A divorce decree is a legal document that outlines the terms of a couple's divorce, including the division of assets, child custody, and financial support. Life insurance policies are often addressed in divorce decrees, especially when there are dependent children or financial obligations such as alimony or child support involved.

Now, let's focus on the cash value of life insurance policies in the context of divorce decrees:

The cash value of a life insurance policy is an important consideration during divorce proceedings. This value refers to the savings component of certain types of life insurance policies, typically whole life or universal life insurance. In these policies, a portion of the monthly premiums contributes to a fund that grows over time, and the policyholder can choose to withdraw this cash value instead of receiving a death benefit.

During a divorce, the cash value of a life insurance policy is often considered a marital asset, similar to other financial investments or properties. This means that the court may order the cash value to be divided between the spouses as part of the divorce settlement. The specific division may depend on the financial circumstances of the couple and the laws of the state in which the divorce is taking place.

In some cases, the court may direct the policyholder to surrender the policy and split the accumulated cash value with their ex-spouse. Alternatively, the court may allow the policyholder to retain the policy and simply divide the cash value amount between the spouses. It's important to note that term life insurance policies, which do not have a cash value component, are typically not considered marital assets and are usually not divided in the same way.

If you have a permanent life insurance policy with a cash value, it's crucial to include this value in your financial disclosures during divorce proceedings. By listing the policy and its cash value as a marital asset, each spouse can ensure they receive their fair share of this accumulated wealth. This is particularly relevant in states with community property laws, where most assets accumulated during the marriage are divided equally.

Additionally, the cash value of a life insurance policy can impact the beneficiaries and ownership of the policy. If one spouse retains the policy, they may need to reimburse their ex-spouse for their share of the cash value. Moreover, the court may order changes to the beneficiaries, especially if there are children involved or if one spouse is receiving alimony or child support.

In summary, the cash value of life insurance policies can be a significant factor in divorce decrees. It is often treated as a marital asset and divided between the spouses, with the specific division depending on the financial circumstances and applicable state laws. Term life insurance policies, lacking a cash value component, are generally treated differently and may not be considered marital assets. Proper consideration and disclosure of the cash value during divorce proceedings are essential to ensure a fair division of assets and to protect the financial interests of both spouses and their dependent children.

Protecting alimony and child support

Amount of the Policy

The policy amount should be carefully calculated to ensure it covers the required alimony and child support payments. This includes considering the duration of support, such as child support typically ending when the child reaches the age of majority or graduates from high school. Spousal support may vary based on the length of the marriage, the financial situation, and the presiding judge's discretion.

Type of Life Insurance Policy

The choice between term life and whole life insurance is an important decision. Term life insurance provides coverage for a specific period, such as 10, 15, or 20 years, and is generally more affordable. On the other hand, whole life insurance offers permanent coverage for a higher cost and often includes additional benefits like cash value accumulation. An experienced financial advisor can help determine which type of policy best suits your needs.

Beneficiary Designation

In the case of spousal support, the supported spouse is typically designated as the beneficiary. For child support, the decision becomes more complex. If the supporting spouse passes away, will the children directly receive the policy payout? In such cases, it is essential to consider establishing a trust to manage the funds on behalf of the children.

Funding the Policy

Funding the policy raises several questions. Will the supporting spouse bear the entire cost, or will the supported spouse contribute? If the supporting spouse funds the policy, will their income before or after paying the premiums be used to calculate support payments? These are crucial considerations in ensuring fairness and adequacy in funding the policy.

Oversight and Transparency

The supported spouse should have a mechanism to monitor the policy's status and any changes to beneficiaries. This can be achieved through duplicate statements, automatic notifications from the insurance carrier upon premium payment, or direct verification with the insurance company. Transparency ensures peace of mind and compliance with court orders.

Cancellation and Termination

While it seems intuitive that the policy should terminate when the support obligation ends, it is crucial to explicitly state this in the settlement agreement to avoid confusion. Additionally, the supported spouse may want assurances that a reputable insurance company is used to reduce the risk of the company going out of business.

Health insurance after divorce

Divorce can be a challenging transition, and it's important to consider how it will impact your health insurance coverage. Here are some key things to keep in mind:

Impact on Coverage

When a couple is married, they are often covered under one health insurance plan, typically provided through an employer. During the divorce process, both spouses usually remain insured under the existing plan. However, once the divorce is finalised, the non-policyholder spouse is no longer considered a family member and will lose their coverage under the plan.

Temporary Orders

In many states, courts automatically issue temporary orders or temporary restraining orders to maintain the financial status quo during the divorce process. These orders prohibit either spouse from altering or cancelling health insurance policies. If you live in a state without such automatic orders, you may need to request a judge to issue a specific order regarding health insurance.

Finding New Coverage

The non-policyholder spouse will need to find new health insurance coverage and pay their own premiums. This can be a significant change, especially if they have been out of the workforce and need to secure their own insurance for the first time in years.

Options for New Coverage

• Employer-sponsored plan: If the non-policyholder spouse is working, they can enrol in their employer's health plan. Most employer-sponsored plans allow enrolment within 30 days of the finalisation of the divorce.
• COBRA coverage: The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows individuals to maintain their existing health coverage for up to 36 months after a qualifying event, such as divorce. COBRA applies to employers with 20 or more employees, and enrollees must pay the full monthly premium plus a 2% administrative fee.
• Affordable Care Act (ACA) plan: The ACA offers health insurance plans through the government's Health Insurance Marketplace. A special 60-day enrolment period is available for those who lose coverage due to divorce.
• Medicaid or Medicare: If your financial situation has changed due to divorce, you may qualify for Medicaid, a government program providing free or low-cost health care for low-income individuals and families. Medicare, on the other hand, is for individuals 65 or older or with certain illnesses and disabilities.
• Short-term insurance: This type of insurance provides flexible, temporary coverage during life transitions. However, it may not cover essential health benefits, and availability and term limits vary by state.
• Private or off-exchange plans: These plans may be an option if other choices are not available, but be cautious as they often have coverage limitations and exclusions.

Impact on Children

Children can remain on their parents' existing insurance plans as dependents without disruption. They may also switch to the other parent's insurance or be covered by both plans if necessary. When child support is involved, federal law requires the inclusion of medical support, which can be private health insurance, public coverage like Medicaid, or payment towards the child's health care costs.

Negotiating Health Insurance

Health insurance is a significant expense and should be addressed as part of the divorce settlement. Spouses can agree to pay for their own health insurance or negotiate for one spouse to cover the other's insurance for a period or provide a lump-sum payment.

Frequently asked questions