Understanding Divorce Decrees And Their Impact On Life Insurance

Divorce is a challenging process that demands numerous changes in one's life, and it can be emotionally draining. While it may not be top of mind, it is essential to address life insurance during a divorce to protect the financial interests of both parties and any dependent children. A divorce decree may require one or both parties to purchase a life insurance policy, especially if there is alimony or child support involved. This policy serves as financial protection for the ex-spouse and any minor children who depend on the higher-earning spouse. The type of life insurance and coverage amount are typically left to the individual to decide, but the divorce decree may mandate keeping the ex-spouse as a beneficiary. Understanding the different types of life insurance, such as term or whole life, and their implications is crucial when navigating this aspect of a divorce settlement.

Court-ordered life insurance

The owner of a court-ordered life insurance policy can be either spouse or a third party. The court may enforce the ex-spouse as an irrevocable beneficiary, meaning the policy cannot be changed without the beneficiary's authorisation. Alternatively, a third-party owner, such as a custodian or trust, can be assigned ownership. This approach protects against unwanted changes to the policy but incurs additional costs.

The beneficiary of a court-ordered life insurance policy is typically the ex-spouse receiving alimony or child support. However, in some cases, a trusted friend or family member may be designated as the beneficiary, acting as a custodian responsible for using the funds in the best interest of the children. Another option is to establish a trust and name it as the beneficiary, allowing a chosen trustee to manage and distribute the funds according to specific instructions.

When court-ordered life insurance is required, the judge will usually assign a deadline for the policy to be active. The policy requirements, including the type of coverage, coverage amount, and policy duration, must be carefully reviewed. The appropriate beneficiary or beneficiaries must be designated as specified by the court. Obtaining court-ordered life insurance can take time, so it is essential to start the process well in advance to meet the deadline.

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

Changing beneficiaries

If you have children and are getting a divorce, they may be your preferred beneficiaries. However, it's worth noting that naming minor children as beneficiaries can cause legal complications and delays in benefit payments. To avoid this, you can set up a living trust and name it as your life insurance beneficiary. The trustee, an adult of your choice, would then manage and distribute the funds for the benefit of your children according to the instructions included in the trust. Alternatively, you can name whoever would be your child's primary caretaker if you died as the beneficiary.

If no children are involved, there are few good reasons to continue having an ex-spouse as your life insurance beneficiary. If you are the policyholder and won't be supporting your ex-spouse financially after the divorce, you can likely remove them as a beneficiary. However, if you are required to pay alimony or child support, you may need to keep your ex-spouse as a beneficiary. Consult your divorce lawyer to determine if it's possible to remove your ex-spouse from your policy.

If you want the death benefit from your life insurance policy to go to your child after your divorce, be sure to appoint a custodian and create a trust.

Cash value of the policy

The cash value of a life insurance policy is a sum of money that accumulates in a special account over time. This is a feature of permanent life insurance policies, such as whole life insurance, and is absent in term life insurance policies. The cash value component can grow over time and is often considered a marital asset, as it can be borrowed against or cashed out.

During divorce proceedings, the cash value of a life insurance policy may be treated as a joint marital asset by the court and divided between the spouses. The treatment of the cash value component depends on the state in which the divorce is taking place. In some states, the court may direct the policyholder to surrender the policy and split the proceeds equally. In other states, the divorcing couple may divide the cash value in another way.

If you have a permanent life insurance policy with a cash value component, it is important to include this amount in your net worth calculation before the divorce proceedings. This will allow the court to consider the cash value when dividing the marital assets.

Additionally, if you are the owner of a term life insurance policy, you may be able to keep the policy and its cash value after the divorce, as it is often treated as a separate asset.

It is important to note that the treatment of the cash value of a life insurance policy during a divorce can be complex and may depend on various factors, including the type of policy, state laws, and the specific circumstances of the divorce. Consulting with a divorce lawyer or financial professional is advisable to understand how the cash value of a life insurance policy will be handled in your specific situation.

Protecting alimony and child support

Understanding the Need

It's essential to recognize that divorce can significantly impact your financial situation, especially if you have children or alimony payments. Life insurance can provide financial protection for your family if something happens to you.

Selecting the Right Type of Policy

When choosing a life insurance policy, you have options such as term life and whole life insurance. Term life insurance covers you for a specific period, usually until your child becomes an adult, and is more affordable. Whole life insurance, on the other hand, provides permanent coverage for your entire life and often includes a cash value component. While it is more expensive, it offers additional benefits and can be useful if you want more extensive coverage.

Calculating the Required Coverage

The amount of coverage you need depends on factors such as the duration for which alimony or child support will be paid and the standard of living you want to maintain. Consider your financial obligations and calculate the sum required to secure your children's future and maintain your ex-spouse's lifestyle.

Choosing the Beneficiary

In the case of child support, the children are usually the beneficiaries. However, if they are minors, consider setting up a trust or appointing a custodian to manage the funds on their behalf. For spousal support, the supported spouse should be the beneficiary.

Monitoring the Policy

If you are the supported spouse, ensure you have a way to monitor the policy's status and any changes to the beneficiaries. Request duplicate statements, set up automatic notifications for premium payments, or ask the insurance company for a dedicated phone number to verify payment.

Addressing Policy Ownership and Premium Payment

Consider who will own the policy and pay the premiums. The supporting spouse typically funds the policy, but the cost can also be shared. If the supported spouse owns the policy, they have more control over the beneficiaries and can ensure the policy remains active.

Including Life Insurance in the Divorce Decree

Work with your divorce lawyer to include life insurance requirements in your divorce decree. This ensures that your ex-spouse is mandated to obtain life insurance to protect alimony and child support payments.

Regularly Reviewing and Adjusting the Policy

Life circumstances can change, so it's important to review and adjust your life insurance policy periodically. This includes assessing the benefit amount, beneficiaries, and other relevant factors to ensure they align with your current situation.

By following these steps, you can effectively protect alimony and child support payments through life insurance, providing financial security for yourself and your loved ones.

Who pays the premiums

The responsibility of paying the premiums for a life insurance policy is an important consideration during divorce proceedings. It is crucial to have clear terms and responsibilities outlined in the divorce decree, as any lapse in premium payments could negatively impact the beneficiaries.

If you are the primary custodian of your children and cannot rely on your ex-spouse for financial support, you may want to take ownership of the policy and pay the premiums yourself. This ensures that the policy remains active and provides continued protection for your children.

In situations where your ex-spouse is no longer in the picture, and you are solely responsible for raising your children, it is advisable to obtain a life insurance policy for yourself and pay the premiums. This way, you can guarantee coverage and financial protection for your dependents.

The type of life insurance policy chosen can also impact premium payments. Term life insurance policies, which offer coverage for a specified period, tend to have lower premiums than whole-life policies. However, whole-life policies build cash value over time, providing additional benefits.

It is worth noting that the court may require a policyholder to maintain an existing life insurance policy as part of a divorce settlement, especially if there are child support or alimony obligations involved. In such cases, the court's mandate will outline who is responsible for paying the premiums.

Consulting with a divorce attorney and financial professional is essential to navigate the complexities of life insurance during a divorce and ensure that the best interests of all parties, especially any children, are considered.

Frequently asked questions