When you own life insurance and get divorced, it might require court-ordered life insurance changes. For instance, you may be required to keep life insurance on an ex-spouse, continue to list them as a beneficiary or buy a policy to cover the former spouse. If you have permanent life insurance, the settlement may require you to share part of the cash value with your ex.
If there’s no alimony or child support requirement, consider updating your beneficiary to someone other than your ex-spouse. Regardless of the changes a divorce causes, nothing will happen automatically. You must complete all updates and changes yourself and ensure they satisfy the terms of a court-ordered divorce life insurance agreement, if applicable.
Table of Contents
- Life Insurance During and After a Divorce
- What Happens to Your Life Insurance After a Divorce?
- What to Do About Your Life Insurance Policy After a Divorce
- Can You Remove Your Ex-Spouse From Your Policy?
- Should You Keep Coverage on Your Ex-Spouse?
- How Much Coverage Does a Divorced Parent Need?
- Frequently Asked Questions About Life Insurance After a Divorce
When you divorce, you might have to keep life insurance in place, buy life insurance or split cash value life insurance with your ex-spouse.
Consult your divorce attorney before making changes, clarify in writing who should pay and consider keeping coverage after a divorce if you have minor children together.
If you rely on your ex-spouse for financial support or have minor children together, keeping life insurance on your former spouse may be in your best interest.
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Life Insurance During and After a Divorce
If you’re in the middle of a divorce, it’s a good idea to avoid changing your life insurance when separated until after the divorce. As part of the divorce agreement, the judge may order you to keep coverage in place, buy life insurance to protect alimony and child support payments, or divide the cash value into a permanent life policy.
The type of life insurance you have and the outcome of your divorce settlement matter when making changes to life insurance after a divorce, as outlined below.
You may be required to keep coverage.
Suppose a divorce agreement requires one spouse to make child support or alimony payments. In that case, the opposing attorney might also require them to keep a life insurance policy in force and list the ex-spouse as the primary beneficiary. This is usually mandated so that if something happens to the paying spouse during their payment agreement, the surviving spouse can still maintain their lifestyle and provide financial support to their minor children.
If you aren’t covered, you may be required to get coverage.
If you don’t currently have life insurance and you’re mandated to pay child or alimony support, you could be required to buy court-mandated life insurance. The court order may require only the paying spouse or both spouses to purchase and keep life insurance with the ex-spouse as the beneficiary. Even if you’re mandated to buy life insurance, you get to decide which type of life insurance you buy, as long as you have a minimum amount to cover support payments.
Cash value is divided between spouses.
Some life insurance policies have cash value, which becomes part of the marital property or estate. The couple or judge will determine how to divide the cash value between the former spouses as part of the divorce agreement.
When you buy permanent life insurance, it includes a cash value account, which is similar to a savings account. The cash value will grow over time, and you can borrow against or withdraw from this value if you decide to surrender or cancel the policy. How you divide the cash value may depend on the cash value amount and division requirement.
An asset is something someone owns with economic value, and they expect to have a future benefit that is convertible to cash. Examples of assets people can own include real estate, bank accounts, investment accounts and cash value in life insurance.
A marital asset includes any property the couple acquires together during marriage. This could be the couple's home, investment properties or accounts, pensions, stocks, cars and life insurance cash value. Anything acquired before the marriage is considered a premarital asset. You can regard the value increase during the marriage as part of the marital assets during a divorce.
Common Life Insurance Problems During and After a Divorce
Several issues can arise during a divorce that may disrupt your financial planning and lead to legal challenges. These may include the following:
- Beneficiary Disputes: One of the most common issues is disagreements over who should be the policy's beneficiary, especially if children are involved.
- Policy Ownership Conflicts: Determining who gets to keep the policy or how you should divide it can become a contentious issue for joint policies.
- Missed Premium Payments: During the upheaval of divorce, it's easy to overlook premium payments, leading to policy lapse and loss of coverage.
- Overlooking Cash Value: In policies like whole or universal life insurance, the cash value is often forgotten or underestimated during asset division.
- Failure to Update Policies: Many people forget to update their life insurance policies post-divorce, leading to unintended beneficiaries.
- Tax Implications: If you cash out a life insurance policy with a significant cash value, the amount that exceeds your total premiums could be considered taxable income. Similarly, dividing a joint policy's cash value during a divorce may incur taxes for both parties. You may consult a tax advisor for personalized guidance.
- Legal Costs: Disputes over life insurance can lead to legal battles, adding to divorce's financial strain and emotional stress.
Awareness of these common problems can help you proactively mitigate them.
What Happens to Your Life Insurance After a Divorce?
What happens to your policy largely depends on the type of life insurance you have—be it individual or joint.
If You Have an Individual Life Insurance
- Beneficiary Changes: The most immediate action is to review and possibly update the beneficiary designation. If your ex-spouse is the beneficiary, you may want to change it unless court-ordered otherwise.
- Policy Ownership: If you own the policy, you can make any changes you see fit, including canceling it. However, if you're paying alimony or child support, you may be required to keep the policy active.
- Cash Value: If your policy has a cash value component, like whole or universal life insurance, it may be considered a marital asset. This means the cash value might be subject to division during the divorce settlement.
- Premium Payments: Ensure that premium payments continue to be made on time, especially if the policy secures alimony or child support payments.
- Consult Legal Advice: Given that life insurance can be a part of divorce settlements or court orders, consult your attorney to understand any legal obligations or restrictions you may have regarding your policy.
If You Have a Joint Life Insurance
- Separation into Two Policies: Some insurance providers allow you to split joint policies into two individual policies. This process is often the cleanest way to separate life insurance during a divorce.
- Transfer of Ownership: One spouse can take over the policy, becoming the sole owner and payer of premiums. The cash value, if any, would then belong to the owning spouse.
- Cash Out the Policy: If both parties agree, the policy can be surrendered for its cash value, which can then be divided as agreed upon or as ordered by the court.
- Maintain the Policy: In some cases, especially where children are involved, both parties may decide to keep the joint policy active. This option requires a clear agreement on premium payments and beneficiary arrangements.
- Legal Consultation: Joint policies often involve more legal intricacies. Consult your attorney to understand the legal implications of any joint life insurance policy changes.
Understanding the above nuances is critical to making informed decisions during a transitional life phase.
What to Do About Your Life Insurance Policy After a Divorce
After a divorce, you should make a point to update your life insurance policy, as it won't happen automatically. Depending on your court-ordered life insurance beneficiary rules after divorce, you may wish to remove your spouse from your life insurance as a beneficiary.
Multiple scenarios could surface during and after a divorce with a life insurance policy. Below are things policyholders should consider when going through a divorce and changes that may you may need after a divorce.
Consult your divorce attorney.
Before you change your life insurance policy, consult your divorce attorney first. Ask questions like, "Can I remove my spouse from my life insurance?" or "Can I change my life insurance beneficiary during a divorce?" before updating your policy. You don't want to cause any issues with an impending divorce or breach a divorce settlement after you finalize it.
Take inventory of all current insurance policies.
List all existing life insurance policies you and your spouse have. This list should include the type of life insurance, your coverage, any riders included, the cash value amount and the company the policy is with. This list can help with divorce proceedings to ensure correct asset accounting, especially if cash value is involved. Some states require each spouse to provide an Affidavit of Insurance Coverage as part of the divorce paperwork.
Clarify who pays for the policy.
The divorce agreement should clarify who pays and maintains life insurance, especially if the former spouse will remain the policy's primary beneficiary. If the life insurance lapses, it could be detrimental to the beneficiaries if the insured dies, as there would be no death benefit available to the surviving spouse as the beneficiary.
Update your coverage.
A divorce can lead to significant changes in the amount of life insurance you need to keep in place. Review your policy carefully during and after divorce to ensure you’re covered, and update your coverage if needed. If your ex-spouse wants to cover college tuition for your shared children and you want to ensure car payments are covered after death, for example, you might need more coverage if your existing policy isn’t sufficient.
Consider cashing out.
If you have permanent life insurance with cash value, you should consider whether keeping the policy is best or if cashing it out might make more sense. If you keep the policy in force, you may need to pay your former spouse their portion of the value as part of the divorce settlement. Although you can take a loan against the value or withdraw from it, the amount will lower the death benefit if you die and haven’t replaced the cash value amount, plus interest.
Consider changing to a term life policy.
Term life insurance is much cheaper than permanent life insurance. Cashing out a permanent life insurance policy and buying term life insurance instead may be a better financial decision than keeping the permanent policy in place. You can use the cash surrender value to pay your ex-spouse their portion, invest it, save it in an account or use it another way.
Remove your ex-spouse as a beneficiary.
An ex-spouse can collect life insurance proceeds if you don’t remove them as a beneficiary. As long as your policy beneficiary is revocable, you can remove your ex-spouse from your life insurance policy, even if they don’t consent to the change. The beneficiary has to agree to removal if the policy has an irrevocable beneficiary clause. When no children are involved, it may be a good idea to update your beneficiary as soon as you settle the divorce.
Consider maintaining coverage for the children.
If you have children together, keeping life insurance on an ex-spouse after divorce might be best. Ideally, both parents should keep life insurance with the ex-spouse listed as the beneficiary. This can ensure that as long as your children are minors, they will be financially taken care of, no matter which parent dies.
Can You Remove Your Ex-Spouse From Your Life Insurance Policy?
You may be able to remove your ex-spouse as a beneficiary of your life insurance policy. It depends on the court-ordered divorce agreement's terms and conditions. For example, you may want a requirement for both spouses to keep life insurance on the ex-spouse so they can care for minor children in the event of one parent's death.
Whether you can remove an ex-spouse as a beneficiary depends on the type of beneficiary they are. You can change a revocable beneficiary without getting permission or consent from the existing beneficiary.
But if you have an irrevocable beneficiary, the life insurance company will require you to get consent from the existing beneficiary before making the change. If your ex-spouse is an irrevocable beneficiary on your policy, they have to give permission for you to change the designation.
Knowing this information before reaching a divorce agreement is helpful, especially if you plan to remove your spouse from your life insurance policy after divorce.
You can remove a revocable beneficiary at will and without getting the beneficiary’s consent. As your life changes, it can make sense to change your beneficiary as well. For example, you might name a parent or sibling as beneficiary while single but change it to your spouse or child after you get married.
When you designate someone as an irrevocable beneficiary, you cannot remove them involuntarily. The irrevocable beneficiary must consent to removal. Parents often name their children or a trust as irrevocable beneficiaries.
When Should You Have Life Insurance on an Ex-Spouse?
If you rely on your ex-spouse for financial support, then you should consider keeping life insurance on your ex-spouse.
Below are a few scenarios when keeping life insurance on a former spouse might make sense. Learn more about how to buy life insurance on your ex-spouse and circumstances when it makes sense.
To buy life insurance on an ex-spouse, you must have consent from the insured person. If they don’t consent, you cannot buy insurance on their life unless mandated by a settlement.
You rely on them for financial support.
If your ex-spouse is mandated to pay you alimony or child support as part of the divorce agreement, you may want to require that they maintain life insurance on themselves with you as the beneficiary. If they were to die before the support payments expire, you can use the life insurance death benefit as payment for the remaining support you would lose if you didn't have child support or alimony life insurance.
You have children.
If you and your ex-spouse have children together, it may be wise to maintain life insurance on each other with the former spouse listed as the beneficiary. The coverage would replace any financial support they provide, allow your children to remain in their accustomed lifestyle and cover education expenses.
If you need to buy life insurance during or after a divorce, it’s usually better to buy a term life policy and invest the difference of a more expensive permanent life insurance policy. Term life insurance covers up to 30 years, which is usually enough to satisfy a divorce agreement. MoneyGeek analyzed some of the best term life insurance companies to help you shop and compare companies, policies and rates.
How Much Life Insurance Does a Divorced Parent Need?
The amount of life insurance a divorced parent needs depends on your specific situation. Start by considering how many years you’ll be paying child support — for instance, you could subtract your youngest child’s current age from the age the child will be when you no longer need to provide financial support. Calculate the total payments for alimony and child support per year, add in any extras like education costs, and then multiply that number by the number of years of support. This calculation can give you an idea of how much life insurance you might need.
Consider other debts you might want to cover with life insurance, like car payments, student loans, your child’s college expenses or a mortgage. If you cover more than support payments, consider how you want your death benefit divided. If you don’t want a single beneficiary to get the entire sum, designate more than one primary beneficiary. It might also be a good idea to include a contingent beneficiary in case the primary beneficiary can’t be located or dies before you.
There is more than one way to determine how much life insurance coverage divorced parents need. This formula uses the age of your youngest child and your annual income to determine the minimum recommended amount of coverage.
Using this formula, you first subtract 18 from the age of your youngest child. Then, multiply that figure by your annual income. Multiply this amount by the number of years you want to provide financial assistance.
This general rule of thumb is useful because it covers your income until your youngest child is financially independent. If you choose a term life insurance policy that covers until they turn 18, it serves its purpose once they reach 18 if you haven't died or will provide a death benefit to replace your income if you die before they turn 18.
Let's say your annual income is $65,000, and your youngest child is three. As a divorced parent, you want to ensure your ex-spouse can afford to care for your children without financial difficulty if you pass away. Using the formula above, you'd have to cover at least 15 years of your annual income. The total minimum recommended coverage amount is $975,000 on a 15-year term life insurance policy.
Finding the Right Type of Life Insurance After a Divorce
Your life insurance needs will likely change after a divorce, and finding a policy that aligns with your new circumstances is essential. Below is a step-by-step guide to simplify the process of selecting the right life insurance policy post-divorce.
Assess Your Financial Obligations
Think about your financial responsibilities. Consider alimony, child support, debts and any other obligations that would impact your loved ones if you were no longer around.
Determine the Coverage Amount
Calculate the amount of coverage you'll need based on your financial assessment. This should be enough to cover your financial obligations and provide a safety net for your dependents.
Choose the Right Policy Type
Decide between term, whole or universal life insurance based on your needs. Term life is often sufficient and more affordable, but whole or universal life can offer additional benefits like cash value. There are also other types of policies catering to different needs.
Shop Around for Quotes
Compare rates from different providers to ensure you're getting the best deal. Online comparison tools can be particularly helpful here.
Review the Policy Terms
Read the fine print carefully. Before committing to a policy, ensure you understand the terms, including any exclusions or limitations.
Before finalizing your decision, you may consult with financial advisors and legal professionals to ensure the policy meets your needs and complies with any court orders or legal obligations.
Make the Purchase
Once you're confident in your choice, go ahead and make the purchase. Keep all relevant documentation in a safe place and inform your beneficiaries about the policy.
Compare Life Insurance Rates
Ensure you're getting the best rate for your life insurance. Compare quotes from the top insurance companies.
Frequently Asked Questions About Life Insurance After a Divorce
Life insurance is an important factor spouses should consider during a divorce. Answers to these common questions about divorce life insurance may help you decide what’s best for your situation.
Expert Advice on Life Insurance After Divorce
- Can you remove your ex-spouse from your life insurance policy?
- Can you keep life insurance on your ex-spouse after a divorce?
- What should you do about life insurance policy after a divorce?
- How much life insurance does a divorced parent need?
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Managing Partner, Wealth Advisor at Arise Private Wealth
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