If you’re going through a divorce you need to protect yourself financially. Getting divorced is a traumatic, emotional experience. You’ll be going through several major changes at once:
- Ending a long-term relationship.
- Dividing all of your personal possessions and assets.
- Splitting your family up and deciding who gets custody of your children.
- Changing your social circle and relationships.
- Potentially relocating and moving out of a familiar environment.
With all these concerns, the last thing on your mind is life insurance.
That’s why we’re here to help you make the transition and educate you on important life insurance factors. Just remember—Big Lou® is not an attorney. He’s a life insurance expert with over 30 years of experience helping 100,000 people just like you solve challenging life insurance problems. Be sure to work together with your attorney and a life insurance expert to navigate your life insurance options during a divorce.
Big Lou® is just like you. He’s been through several divorces. He’s felt the pain of loss, and the soul crushing feelings of depression. Big Lou® is about facing reality and doing what’s right for you and your future. Big Lou® is about Reality in Life Insurance.
There’s several important factors to consider when getting a divorce and dealing with life insurance issues. Here we cover the top 4 factors you need to consider about life insurance and divorce.
- Establishing financial security and the well being of dependents.
- Updating and maintaining existing life policies during the divorce.
- Establishing beneficiaries and protecting pensions with life insurance.
- Dealing with existing life insurance policies that have cash values.
We’re Getting Divorced and We Have an Existing Life Insurance Policy with a Cash Value—What Do We Need to Know?
In the process of divorce you may find that either you or your spouse (or your children) own whole life insurance policies with cash values.
How are Existing Life Insurance Policies Characterized During Divorce?
There are two primary types of life insurance: whole life and term life. With existing policies, term life is the easier of the two to deal with as there’s no real cash value (also known as the surrender value). Whole life policies have a cash value and are therefore more difficult to deal with.
Let’s cover the basics of how your existing policies will be affected by your divorce.
Life insurance is characterized as separate or marital property in states that have equitable distribution of property laws, or as separate or community property (in community property states). You can find out what your state is characterized as here.
In general if the life insurance policy was purchased by you or your spouse before getting married, and paid for with your own assets (again, before marriage) the policy will remain separate property and may not be contested in the divorce.
However, a life insurance policy purchased during marriage will most likely be considered marital or communal property (depending on the state) if all premiums are paid with marital or communal funds. In these situations it’s best to work closely with a life insurance agent and your attorney to clarify who owns what.
If the life insurance policy premiums were paid partially before the marriage, during the marriage, and before the divorce proceeding—things can get tricky. In other cases we’ve seen policy premiums that are paid with a combination of separate and shared funds—also creating another tricky situation for dealing with an existing life insurance policy during a divorce.
Using Life Insurance to Establish Financial Security for Dependents & Custodial Parents
Life insurance is sometimes mandated by the court to guarantee the financial security of dependents. Alimony, child support, healthcare, and other forms of payment can also be made from one spouse to another. Frequently this includes the payment of life insurance premiums.
For life insurance purposes a beneficiary is someone who receives payment from a life insurance policy when the policyholder dies. As part of a divorce it may be required that both spouses secure a life insurance policy and name the children (or the custodial parents) as the primary beneficiary of the policy. Since your children have an insurable interest in you, naming your children as the beneficiary is a typical practice.
Alimony Payments and Life Insurance
Over 70% of custodial parents receive child support in the United States as shown by the graph below. Whenever this happens it’s common that the judge will require some form of financial security to guarantee the payments over a specified period of time.
If you make alimony payments (also called spousal support) as part of your divorce settlement the court may order you to secure life insurance and name your ex-spouse as the beneficiary. The life insurance will guarantee the financial security of your spouse (and possibly your children) should you die. It’s important to remember that minors (anyone under age 18) cannot legally be the beneficiaries of a life insurance policy.
Updating and Maintaining Existing Life Insurance Policies—or Making Changes
During the discovery process of a divorce most of you and your spouse’s financial history will be under detailed scrutinization. In the simplest cases you’ll simply need to remove your spouse from your life insurance policy, or change the beneficiary. Problems can arise during the divorce as the court may “freeze” your assets and/or prevent you from making any changes to exisiting life insurance policies.
If you’re considering filing for a divorce be sure to take stock of your life insurance portfolio and seek counsel before making any final decisions.
Establishing Beneficiaries and Protecting Pension Income
In order to name someone as a beneficiary on your life insurance policy they must have an “insurable interest.” That means that they must be financially impacted at the time of your death. If you don’t have any children and your spouse doesn’t depend on you financially then your needs are much simpler.
In some cases, divorcees without children will name their estate as the beneficiary—this way money will be distributed to the beneficiaries of your will or trust. Be sure to consult with your accountant if you want to pursue this path—life insurance payments can incur significant estate taxes when structured this way.
Just remember—if divorce proceedings have already started you won’t be able to change any of your policy designations (like the beneficiary). After the divorce is finalized you’ll want to double check your life insurance policy beneficiaries again.
In many divorce cases one or both spouses have future pension income. If you or your spouse is required to pay alimony or child support you will likely be required to secure a policy that insures this future income.