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5 Life Insurance Mistakes People Make When Getting Divorced

Posted In: Divorce
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Divorce can lead to a whirlwind of financial decisions. Investment and bank accounts must be reviewed and divided. Mortgages must be refinanced. Homes may be bought and sold. One of the last thoughts is life insurance, but forgotten updates and changes can be one of many very costly divorce mistakes to avoid.

Not Updating Beneficiaries

The first thing that a policy owner should do during a divorce is update life insurance policy beneficiaries. Even if you update your will, your beneficiary selections on a life insurance policy are not automatically updated with your will.
A 2013 Supreme Court Case ruled that the beneficiaries you designate will ultimately receive the insurance payout in the event of your passing, even if that person is your ex-spouse or the estate of an ex-spouse.
In the court case, a couple divorced and the insured husband did not update his employer provided life insurance beneficiary when they divorced. Two years later, he remarried and still did not update the beneficiary. Eight years later, he passed away. Because the ex-wife, whom he had divorced a decade earlier, was still listed as the beneficiary, she received the life insurance payout. This is one of the worst divorce mistakes you can make.

Over time the people we want to benefit from our life insurance policies may change. Whether you have a new spouse or prefer to designate your children or anyone else, be sure to update that with your insurance company. This important step should not be taken lightly!

Paying on an Unneeded Policy

After a divorce, you may be ordered by a court to make alimony payments to an ex-spouse. In some cases, the court will order you to maintain a life insurance policy benefiting that ex-spouse as well, but not in all cases.

If you only kept a life insurance policy to benefit a spouse that you are now divorcing and don’t have any other potential beneficiaries in your life, you may not need to keep the policy at all any longer.

In this case, you have a couple of options. One option is to stop paying and cancel the policy, which will save you a monthly payment in the future. Your second option is to offer your ex-spouse to take over the policy and make payments going forward. In that case, if you pass away the ex-spouse will still receive the insurance policy payout, but has to carry the burden of the expense until that time.

Remember that getting a new policy will cost more than your old one, so if you have a possibility of getting remarried or may have any need for the policy in the future, do not rush to cancel it.

Naming a Minor as a Beneficiary

If you decide during your divorce that you want your children to be named your beneficiaries, you have every right to do so. However, naming a minor as a beneficiary can create a very complicated situation in the event of your passing that could delay or prevent the child or children from receiving the anticipated payout.

If your minor children are in the primary custody of an ex-spouse, you can still arrange for the children to receive the funds in the future, but not necessarily while they are still minors.

In this situation, the best option is to create a trust for the children that they can take over at a later date, generally at either 18 or 21 years old, and name that trust as the beneficiary of life insurance funds.

Creating a trust sounds complicated, but can be done quickly and easily with the help of a lawyer or online service like LegalZoom.

Once the trust is established, simply inform your insurance company of the updated beneficiary and you can rest easy that your children will receive the payout of your life insurance policy when they reach adulthood.

Naming Your Estate as a Beneficiary

The only loophole in having your life insurance policy payout determined by what is in your will is naming your estate as a beneficiary. Updating your life insurance policy to name your estate as a beneficiary may seem like a logical option, but there are some serious downsides to that decision.

If you name your estate as a beneficiary, your named recipients cannot receive the payout until after the probate process has completed, which can take months or years to complete.

Further, if you have any outstanding debts or there are multiple claims on your estate, you risk your insurance proceeds going to pay off those debts or going into disputed status rather than your intended beneficiaries.

If you really want the funds to go to a specific destination, make that clear by naming your beneficiaries directly rather than through a personal estate.

Cancelling Your Life Insurance Policy

While previously mentioned in this article, it is important to emphasize: do not rush and cancel your life insurance during a divorce.
Life insurance rates are determined using a basket of risk factors including age and health conditions. In general, life insurance costs go up every year as you age, and health conditions become more likely to arise as you age. The basic rule is that life insurance will always be more expensive in the future than today, and replacing a cancelled policy will most likely cost more than keeping an existing one.

Protecting your loved ones is important, and a dramatic life change like a divorce can prompt people to rush and make hasty decisions. Once you cancel your life insurance, you can’t get it back. Take some time to really consider your future needs before pulling the plug on a long-time policy.

Instead, consider updating the beneficiaries to other family members or a favorite charitable organization. If you ever get remarried in the future, or you have new people in your life who you want to take care of in the event of your passing, you can always update your beneficiaries again in the future.

Common Life Insurance Mistakes Make Divorce More Challenging

Your life insurance policies post-divorce can live on. However, once you cancel, your options become much more limited, or expensive.

If your life insurance has expired or been cancelled, or you have new people to take care of in your life, you can get a 60 second quote for a new policy. Life insurance is an important part of your personal finances. Don’t make the common divorce financial mistake of ignoring your life insurance. You can take care of your children or other loved ones with a quote, and it will take just a minute of your time.