Divorce could be devastating. Even an amicable divorce can cause financial hardship if you think about the expense of establishing and maintaining two individual households. While there are many moving parts during and after a divorce, life insurance tends to be an afterthought.
Life insurance might help protect the assets you’ve worked to build if you’re going through a divorce. While every divorce can have an alternative pair of financial challenges, life insurance could be a crucial part of a divorce settlement.
How exactly to Handle Existing Life Insurance in a Divorce
Married couples often purchase life insurance to cover existing or anticipated debts and other financial responsibilities. These obligations may remain even when a couple decides to go their separate ways. This is exactly why existing life insurance considerations are an important part of a divorce.
To ensure all life insurance has been accounted for, you must offer documentation of most of your present assets, liabilities, and insurance policies, pending a divorce complaint. For example, New Jersey requires each spouse to offer an Affidavit of Insurance Coverage at the beginning of a contested divorce case. This document outlines policies you and your partner had in place during the time you filed for divorce, in addition to policies canceled within yesteryear 90 days.
Taking an inventory of most current insurance policies can help divorce proceedings.
How you handle life insurance requirements will undoubtedly be determined by your present, and future life insurance needs, in addition to the affordability of keeping the policies. For example, let’s say you and your partner each have a term life insurance policy and decide to keep the policies. You could decide to be both the master and beneficiary for one other person’s policy.
When you have a cash-value life insurance policy, you and your partner may decide to terminate the policy and divide the money value equally.
Other considerations may include surrender charges that will reduce the surrender value of a policy.
Questions to Ask Your Attorney About Handling Life Insurance
When consulting along with your attorney, keep in mind the fundamentals of why you bought life insurance in the initial place. Your attorney should then help you determine the near future intent behind your existing and new policies in the context of the divorce. Some questions you might want to ask your attorney include:
- What should eventually be my life insurance policies after my divorce?
- What insurance obligations will I have after my divorce?
- How can I verify my ex-spouse is insured?
- How can we calculate the correct level of life insurance?
- How can we all know if we are insurable?
Since life insurance is usually part of a broader financial or estate plan, it’s wise to consult with a financial planner who will guide you and help you assess life insurance’s affordability and the total coverage you need.
Chris Chen, CFP of Insight Financial Strategists in Massachusetts, says, “Divorce gives individuals the opportunity to ascertain how they want to live separately and how they want to give the children they have together. For example, the supporting spouse may decide they will pay for their child’s college expenses. Therefore, they would want to ascertain if they need additional insurance coverage to account for this potential cost in case they pass away prematurely.”
What Divorce Settlements Often Say About Life Insurance
While marital assets in many cases are split equally among the two parties, a court might determine this one spouse must make monthly alimony or child support payments to the other. These payments will ensure that the children are given to, and the dependent spouse appropriately compensates after the divorce.
Generally, if you have young child support or alimony obligation, the court will demand the spouse pay the support to possess life insurance. If the spouse is making payments that already include a policy like a group life insurance policy, the opposing attorney may require them to keep it.
If they don’t have a policy, they might have to purchase life insurance to ensure there’s still financial support when they pass away.
Both ex-spouses should use their respective attorneys to decide the total amount of the policy, who owns the policy, who pays the premiums, who the beneficiaries are, and how much of the policy goes to each beneficiary.
Rajeh A. Saadeh, a practicing divorce attorney in New Jersey, says, “In a few instances, a payor may not qualify or can’t afford a life insurance policy. In this instance, an alternative solution is always to use a constructive trust, which sets aside a part of the payor’s assets to secure future support if the payor passes away.”
Potential Life Insurance Problems
Here are some very common life insurance issues that arise during and after a divorce.
The change was created to a life insurance policy.
Sometimes the policy owner can make changes to the policy without alerting the beneficiary. For example, if an ex-spouse offers support and owns a life insurance policy, they can change the beneficiary and never notify another ex-spouse.
Or even a policyholder might stop paying the premiums or allow the policy to lapse. This can terminate the policy, leaving one other ex-spouse with no financial safety net in place.
But you can find ways to prevent these problems. One option is for the spouse to receive support to own the life insurance policy. This provides you full control over the payments and the naming of beneficiaries.
Another choice is to possess third-party authorizations on the account to obtain information if changes are manufactured or an alert if the policy is about to lapse.
Insurance firm’s third-party authorizations, the ex-spouse, can learn of changes to the life insurance, such as, for instance, beneficiary changes, directly from the insurance company. In this manner, the ex-spouse receiving alimony or child support can ensure the policy is active and is safeguarding the support payments.
Reallocation of support
Financial circumstances can transform for both parties after a divorce. You will need a reallocation of support if the payor loses his job or the recipient of alimony begins to make far more compared to the payor.
“When there is a recalculation of support, life insurance obligations must be reallocated. Since circumstances often change after a divorce, the family can return to court to reallocate the support and life insurance obligations. However, if possible, handling these matters outside court is more cost-effective and recommended,” says Saadeh.
Insurance obligations
Life insurance needs can also change over time. For example, if your payor is in charge of paying $100,000 in alimony over ten years, the payor may only need a 10-year $100,000 life insurance policy. If the payor has recently paid $50,000 in the initial several years of support, they no longer need a $100,000 life insurance policy to safeguard the compensation. A divorce agreement may permit the payor to step down insurance over time as support is paid.
- The payor could reduce coverage or add a fresh beneficiary for 50% of the life insurance death benefit.
- It’s important to see that the insurance company won’t automatically try this; it’s as much as the policyholder to make these changes.
The Right Forms of Life Insurance After having a Divorce
“The proper type of insurance is determined by everything you already have,” says Chen. “Generally, since cash is short throughout, term life insurance is a good solution for many different financial situations.”
Divorces are financially and emotionally complex. Your life insurance needs are determined by your financial situation and everything you and your ex can reasonably afford. Finding the time to assess your options—and your longer-term financial plans—can help you determine the easiest way to safeguard assets after going your separate ways.
