Sometimes, life insurance as an issue can be overtaken in a divorce by other higher profile and more contentious issues such as child custody, alimony and asset division.
However, life insurance is an important part of the discussion, especially when children are involved, because it can provide years of financial protection for those children and for one or both spouses.
Working through life insurance as part of a divorce does require some effort, as decisions need to be made about cash value if it exists, who the beneficiaries are going forward, and who will pay for the policy, among other things.
There are several possible options regarding life insurance in a divorce:
More often than not, it makes good sense to consult a Certified Divorce Financial Analyst to determine the best options for your financial situation.
In all situations, it should be an integral part of any divorce settlement and should be considerable thought before final divorce papers are agreed upon.
To change the beneficiary of your life insurance policy, you will need to contact your life insurance company and request a Change of Beneficiary form like the one below which you will complete and return to the insurance company.
On the surface, this sounds simple, but who you designate as a beneficiary can be a bit more complicated in a divorce.
Generally speaking, in a divorce very few spouses will want to keep their ex as the primary beneficiary, thus necessitating the change.
In some instances, you will be required to carry a life insurance policy as part of a settlement agreement.
You may also be directed as to who you must name as a beneficiary and this can include keeping an ex-spouse in that capacity.
For these reasons, in a divorce, it is important to understand and review your life insurance policies and update them as needed, otherwise you could be providing a financial benefit to someone you did not want to have it.
Depending on who you choose as a beneficiary, there are several things you should know.
If you want to name your children as beneficiaries and you die before they turn 18, your insurance company will not release the insurance proceeds to them.
Instead, the court that handles your estate would designate a trustee or a custodian to oversee the funds until the children become adults.
Most of the time, courts will name an ex-spouse, and he or she will be permitted to spend the insurance funds to benefit the children.
When the children turn either 18 or 21, depending on the laws of your state, the remaining funds would be turned over to them.
If you want more control over who the custodian for your life insurance funds will be, then you can make that designation instead of listing your children as beneficiaries.
The custodian can be an ex-spouse, but it can also be another relative or a close friend.
If your divorce is acrimonious or you don’t trust your spouse to do the right thing with the proceeds, this is a good insurance policy for your insurance policy.
Another way to look at it is that you can either make this important decision, or you can rely on the possibility that the courts will make the right decision.
Another possibility is to name your estate as the beneficiary of your life insurance policy.
The drawback here is that when a custodian is in place, it generally only takes a week or so for a policy to pay out.
But when the funds are directed to an estate, the funds cannot be released until the estate goes through probate which can sometimes take many months before the funds are released. For this reason, financial planners generally advise against this strategy.
A more solid strategy is to create a trust and have the proceeds from the life insurance policy be directed into the trust.
This makes more sense because a trust avoids probate and you can specifically designate how the money should be allocated and over what period of time.
The trustee will disperse the money according to your wishes.
To make sure that the trust is airtight, it’s best to retain the services of an estate planning attorney to set it up.
In all instances, you should also name contingent beneficiaries for your policy.
You should identify the primary beneficiary and secondary or contingent beneficiaries as well.
This protects the policy if the primary beneficiary passes away before you do.
Designate percentages to each one rather than specific benefit amounts, in case the value of the policy changes for whatever reason.
And whatever you do, don’t name a creditor as a beneficiary.
Be thoughtful, consider any tax implications, and review your beneficiary designations every few years to make sure you stay current on all policies.
Many life insurance policies accumulate cash value over the life of the policy.
This is especially true for whole life and universal life policies.
When you make a premium payment, a portion of that payment is placed into a fund that grows in value and this becomes the policy’s cash value.
It is your money and at any time you can access it instead of it being used to go toward the death benefit associated with your life insurance policy.
The cash value of an insurance policy is considered part of your estate, and in most cases, it will be considered a marital asset.
This means that you and your spouse will be entitled to share in the cash value of the policy.
What that split is will be determined by several factors.
If you live in a community property state, then you are both entitled to 50% of the cash value.
If you live in an equitable distribution state, then you are both entitled to a share of the proceeds.
However, because equitable distribution states use a different set of factors, you may receive either more than 50% of the proceeds or less than 50% of the proceeds.
For example, if a judge decides that you have the lion’s share of the assets following a separation, then to make things equitable, the judge may decide to award a greater share of the cash value to the other spouse to level the asset playing field.
Another scenario that might play out is that a settlement could include one spouse or the other giving up a greater share of the cash value in exchange for receiving a greater share of another marital asset.
This might be an interest in real estate, a retirement account or other real property.
In fact, it’s possible that you could see either 100% of the cash proceeds or no cash proceeds depending on how a settlement is structured.
In some cases, the courts may require that a spouse continue to carry life insurance as a form of protection for a spouse and children in a marriage.
In this case, the cash proceeds may be left intact to make sure there is adequate insurance in place going forward.
If you have primary custody of children in a divorce, then one of your biggest ongoing concerns is to make sure that children are raised in a financially stable environment until they become adults.
This can be especially worrisome if children are very young when you divorce.
If a spouse has been charged with providing child support or alimony as a part of a settlement agreement, the impacts could be devastating if the noncustodial parent passes away prematurely.
One of the ways to protect against this is to have a life insurance policy remain in place as part of a settlement agreement.
Ideally, the amount of the policy should be enough to cover support and alimony payments until children turn 18.
If you are the custodial parent and you don’t trust your spouse, then you may want to own the policy on your spouse and pay the premiums out of existing alimony and support payments to make sure the policy does not fall into arrears and become null and void for payment lapses.
This should be a point of discussion during settlement talks, and you can either tap into an existing policy or you may decide to execute a new policy instead.
Yes. As part of the divorce settlement, one spouse or the other may be required to continue with a life insurance policy or execute a new life insurance policy to make sure child support and alimony payments are insured for a specified amount of time.
Term insurance can be set up to coincide with the specified end of child support obligations.
If a spouse fails to comply with maintaining a life insurance policy as ordered by the courts, then the other spouse can seek a court order to enforce compliance.
This means that a spouse must not only maintain a policy, but they must not substitute another policy or change beneficiaries without prior approval.
Generally, this is something that is worked out as part of the settlement agreement.
As part of alimony or child custody terms, a noncustodial spouse could be required to continue to make payments for a specified amount of time.
If children are involved, this could be until they turn 18 years old.
Technically speaking, the owner of the policy is in charge of making sure the policy remains in effect.
Even if they aren’t required to make payments, they will be the one to monitor whether or not payments are made.
If a spouse misses a payment and providing life insurance is part of a divorce decree, then the other spouse can contact the courts to seek enforcement of the payment of the premium.
It is possible to get a life insurance policy on an ex-spouse, but there are several things to consider.
It could be a mandatory part of a divorce settlement, but in other instances, you may want to initiate a policy as a form of financial protection going forward
First, if you want to purchase a policy, your spouse must be aware that this is the case and they must be willing to cooperate since they will need to answer questions about their health and may be required to take a physical exam.
One way to make it easier on an ex-spouse, especially one that might be disagreeable with this idea, is to get a simplified issue policy where no exam is required.
You will need to decide who actually owns the policy.
To ensure that the policy remains in force and that the premiums are actually paid, many experts suggest that the beneficiary should also be the owner.
This way, if a spouse who is required to carry a policy stops paying and the policy is threatened to be canceled, the owner will be notified and can take steps to make sure the policy remains in force.
As the policy owner, you can actually be the one to make premium payments.
This might come from alimony or child support payments that are paid to you by an ex-spouse, but it does give you more control to ensure payments are made in a timely way.
If a spouse does not pay this portion of the support payments, you can go back to court and seek legal actions to make them comply.
Policy owners are the only ones who can make changes to a policy, including changing beneficiaries.
To purchase a policy on an ex-spouse, you must be able to prove that their death would have a financial impact on you.
You must be able to prove there is a legitimate need for a policy, thus satisfying the requirement of having an insurable interest.
Protecting alimony or child support definitely qualifies in this instance.
Yes. Everything above that applies to an ex-wife also applies to an ex-husband as well.
This can be viewed as a form of child support and should be raised as part of any settlement discussions.
Generally, children are insured with a lower payout, enough to cover funeral and burial expenses if they pass away, although higher coverages may be available at an additional cost.
Any terms that are included as part of the divorce decree are legal and binding, so if your spouse refuses to pay for a life insurance policy and it is part of the settlement agreement, you can seek legal remedy through the courts.
As part of a divorce settlement, especially where alimony or child support are involved, an ex-spouse can make that request to ensure that they are financially provided for in the event the other spouse passes away.
It is common for this to happen, along with a minimum specified amount that the policy death benefit value must be as well.
A settlement agreement may also include a stipulation that if a spouse remarries of when the children reach adulthood that the policy can be canceled.
If the insured dies under circumstances that violate the terms of the policy, then payment can be denied.
This may include instances of suicide, fraud, participation in dangerous or illegal activities, during an act of war, and possibly if the insured is living outside the United States, among others.
Make sure to read the fine print and use common sense because you can’t automatically assume that a policy will pay out under all circumstances.
Life insurance is not distributed through a will.
It is only distributed by the insurance company and will be paid to the beneficiaries as recorded on the policy.
If the owner of the policy wants to change who receives proceeds, then that person will need to submit a change form to the insurance company as a means of redirecting payment.
Only the owner of a policy can change who the designated beneficiary will be on a life insurance policy.
If your ex-spouse is the owner of the policy, then they are the only one who can change the beneficiary.
A divorce decree may require that one spouse maintains a life insurance policy with the other spouse as a beneficiary.
If children are involved in a divorce, then the courts may also order that children could be named as beneficiaries too.
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Jason Crowley is a divorce financial strategist, personal finance expert, and entrepreneur. Jason is the managing partner of Divorce Capital Planning, co-founder of Divorce Mortgage Advisors, and founder of Survive Divorce. A leading authority in divorce finance, Jason has been featured in the Wall Street Journal, Forbes, and other media outlets. He is a Chartered Financial Analyst, Certified Financial Planner practitioner, and Certified Divorce Financial Analyst. You can email him at jason@survivedivorce.com.
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