Disclaimer: Big Lou® is not an attorney. This is not legal advice. You should always consult a lawyer during a divorce. We’ve written this article to give you insight into how life insurance is handled during the divorce process.
Life insurance is an important consideration during your divorce. In this article we’ll cover the two primary characterizations of marital property by state and how that will impact your existing life insurance policies when getting divorced.
What’s the Difference Between Community Property and Equitable Distribution?
During a divorce property, assets, and debt are divided based on two different characterizations: equitable distribution or community property. Most states (40 of them) follow equitable distribution laws.
The primary difference between community property and equitable distribution is that in community property states there is a 50-50 split of all property acquired during the “marital enterprise” (legalize for the legal length of the marriage). This usually excludes pre-marital and exempt assets—therefore preventing any commingling your assets—though every case is different.
In equitable distribution states, more assets can be considered marital property, and the split is not always 50-50. This is because the court will attempt to fairly divide all marital assets based on the circumstances of each spouse. For instance, if one spouse decided to forgo employment in order to raise children, they may receive a greater share of assets due to their decreased earnings potential.
You should ask your attorney if you are concerned about the separation of assets and whether or not an asset is eligible for distribution during a divorce. Your life insurance policies could be considered assets, we’ll cover that later.
In community property states all property of a married person is classified as either community property (owned equally by both spouses) or the separate property of one spouse.
During a divorce community property is usually divided equally between the spouses (50-50 split). Courts do not attempt to divide assets fairly, and do not consider the employment prospects, age, or health of either spouse
Community property is the law of the land in ten states and Puerto Rico:
- Alaska (opt-in state)
- New Mexico
- Puerto Rico
Equitable distribution is the most common characterization of marital property. As noted above forty states (states listed below) follow equitable distribution laws.
Under equitable distribution laws, in the case of divorce, property is divided in a “fair and equitable manner.” This means that property acquired during the marriage belongs to the spouse who earned it and in light of the couple’s circumstance.
In contrast to community property laws, there are no set rules in determining how assets are divided, who receives what and how much are up for debate during the divorce negotiations.
The court will generally consider many factors in deciding how to divide assets. For example they may examine:
- The relative income and earnings power of each spouse
- The value of one spouse’s opportunity cost due to staying home and raising children
- The total earnings potential or total opportunities foregone due to contributions to the marriage and or family (again, usually related to raising children)
Each spouse can generally receive between ⅓ and ⅔ of the total assets and marital property.
States that follow equitable distribution laws are:
- Alaska (opt-out state)
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
How Does My State’s Law Impact Life Insurance During a Divorce?
Since many life insurance policies carry a cash value (also known as a surrender value) any existing policies will be brought up during the discovery process and must be dealt with accordingly. It’s important to discuss the value of any policies with your life insurance agent and your attorney to best understand your options when attempting to construct a post-marital agreement.
If you’re considering divorce or going through the settlement process be sure to secure the services of an experience life insurance professional that can guide you through the complex process of securing life insurance during a divorce.