Life Insurance After a Divorce: Everything You Need to Know

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.

• 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
• Removing Your Ex-Spouse From Your Policy
• When to Keep Coverage on Your Ex-Spouse
• How Much Coverage a Divorced Parent Needs
• Finding the Right Type of Life Insurance
• FAQ About Life Insurance After a Divorce

If you’re in the middle of a divorce, it’s a good idea to avoid changing your life insurance 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.

Navigating life insurance during and after a divorce requires careful planning and adherence to legal obligations. Whether you maintain existing policies, acquire new life insurance to protect alimony and cover child support or divide a policy's cash value, your decisions will have lasting implications for your financial security and that of your dependents.

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. Life insurance beneficiary changes after divorce often require careful consideration to ensure they comply with legal mandates and reflect the intentions of both parties.
• Policy Ownership Conflicts: Determining who gets to keep the life insurance after divorce 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. Managing life insurance after divorce involves maintaining payment schedules to avoid such pitfalls.
• 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: Divorce and life insurance conflicts can lead to legal battles, adding to financial strain and emotional stress.

Awareness of these common problems can help you proactively mitigate life insurance and divorce complications, ensuring your financial strategy remains solid through and beyond the divorce process.

What happens to your life insurance after divorce largely depends on whether you have individual or joint life insurance.

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 these nuances is critical to making informed decisions during a transitional life phase, ensuring your life insurance after divorce aligns with your evolving circumstances.

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 steps policyholders should consider when going through a divorce and changes you may need after a divorce.

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. 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.

If you have an irrevocable beneficiary, the life insurance company will require you to get consent from the existing beneficiary before making the change. Parents often name their children or a trust as irrevocable beneficiaries. If your ex-spouse is an irrevocable beneficiary on your policy, they have to give permission for you to change the designation.

If you rely on your ex-spouse for financial support, 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.

Understanding these nuances helps clarify when life insurance after divorce, particularly life insurance on an ex-spouse, is not just beneficial but potentially essential for financial stability.

The life insurance coverage a divorced parent needs depends on their situation. Start by considering how many years you’ll be paying child support by subtracting 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.

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 lasts until they turn 18, it serves its purpose once they reach 18 if you haven't died, or it 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 minimum recommended coverage amount is $975,000 on a 15-year term life insurance policy.

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.