Life Insurance and Divorce, the Ultimate Guide

Statistics show that almost half of all marriages end up in divorce, and although no one marries with the intention of becoming a statistic, a divorce might be a few years down the line after your marriage begins. Sometimes divorces are smooth, but sometimes it can be a destructive spiral of depression for both parties. 

And whether your divorce is tough or easy, you want to know how to manage your life insurance painlessly, as it is part and parcel of the divorce settlement agreement. You have spent years investing in your life insurance policy, but since your marriage was not the anticipated ‘happily ever after’ kinda scenario, you have to part ways with your partner and find neutral ground on how to handle your issues. 

Even as complicated as it seems, handling life insurance during divorce is not as hard. But you need to understand how it works or else you will end up going in circles and making it harder than it is. 

As such, read on to understand the relationship between life insurance and divorce.

Life Insurance During a Divorce Settlement

Going through a divorce settlement can be very stressful, with all proceedings to establish the division of assets, as well as agreeing on who takes full custody of children, if any are involved. Part of the divorce settlement also includes changing and managing a life insurance policy under both parties. Since financial status is bound to change after the divorce, you may need to amend your policy cover.

While the pace of the whole process might be determined by the type of life insurance policy you have, it could also be impacted by other crucial factors such as child custody, alimony, and asset division. The momentum can take a totally different direction than anticipated where there are children involved, and depending on the financial protection needed for the spouse who becomes their custodian.

The type of life insurance also impacts the decision made, especially where a cash value component exists. These are the different possibilities when it comes to life insurance during a divorce settlement.

• Transferring the policy ownership to one of the spouses due to reasons like ensuring the policy premiums are paid.
• A court order to maintain life insurance for child support and/or alimony purposes.
• Voluntarily keeping the life insurance policy in force to make future financial insurance available for a spouse, children, or both.
• Replacing the current policy with a new one that aligns with the needs of the spouses in the future. For instance, if the insured party is required to pay child support until the children turn 18 years, then a permanent policy can be replaced with a term policy that coincides with that period.
• The cash value can be used as a marital asset, hence policies are canceled to share this among the two spouses.

Depending on the current financial situation, it is advisable to consult with an expert to help you make sound decisions before agreeing on the final divorce papers. 

Life Insurance Uses During a Divorce

A lot of people tend to forget all about their life insurance policy when going through a divorce settlement. Depending on what you agree on, you can choose to cancel the policy or change the beneficiary if you had named your ex-spouse a one. However, life insurance can be vital during a divorce settlement for various reasons. That said, below are some of the uses of divorce settlement during a divorce.

Child Support

One of the biggest concerns for most people during divorce settlement is child support, especially when young children are involved. Perhaps all the needs of your kids, from school fees, daily upkeep, and medical expenses, etc, were well-taken care of before the divorce. And maybe you are the primary caregiver of your kids, while the other spouse was the breadwinner. Should they fail to provide child support, it would be difficult to take care of this child/children the same way, ie providing all their basic needs.

This is where life insurance comes in. During a divorce settlement, life insurance can be used to insure child support obligations from an ex-spouse. So, in the instance the ex-spouse dies prematurely, the policy proceeds go to the other ex-spouse, who is the primary caregiver of the children. The age of the children is a crucial factor in determining how much life insurance is needed because child support obligations often end when the child is 18 years or when they finish high school. 

Protecting Your Children

Where there is no child support with kids involved, how do you ensure that the future of your kids is financially secure? Divorce leaves most people single parents, and while some successfully apply for child support, others don’t. This leaves the single parents solely responsible for the kids. 

So taking out a life insurance policy during divorce is a good way of ensuring that the future of your kids is protected. For instance, ensuring that education expenses for your children are fully paid for even after your demise.

Alimony/maintenance

Life insurance is also often used to protect alimony or maintenance obligations during a divorce. Just like with child support, the paying spouse might die prematurely, which means that the alimony payments cease to be made, hence, life insurance is used to ensure that the surviving spouse receives their payments.

Pension Protection

While child support and alimony are the most common uses of life insurance during divorce, pension protection also applies. With some occupations like civil servants, police, and firefighters, the law requires the pension to be shared equally between them and their spouses. When such a couple divorces, and unfortunately the insured ex-spouse dies, the initial pension payout is not guaranteed especially if the death occurs pre-retirement. 

Life insurance in this case is used to safeguard the future earnings of an ex-spouse.

How it Works

In most cases, when married couples are buying life insurance, they opt for a joint policy. This is a policy for both of them, instead of taking out separate life insurance, and the benefits are paid to either surviving spouse. One of the reasons why it is common is because it is affordable as compared to having an individual policy but on the downside, it is not as flexible. 

Since joint life insurance is rigid, this means that it cannot be divided between two partners if life changes in the future, ie divorce. However, only one partner can take over the policy if it is not canceled after the divorce. 

In the scenario where one partner wants to take over the policy, the other partner will need to sign it over to him/her. This is usually done through a legal document filed with the insurer by the two spouses. If you opt to cancel the policy instead, there will be a surrender value. This means that the insurance company pays you the amount accumulated but it will charge certain fees and penalties for canceling.

You might also have taken out a joint life insurance policy as collateral for your mortgage. Canceling or leaving the policy in force depends on how you choose to handle the property. For instance, you may decide to sell the property, in which case, canceling the policy would be ideal. If you decide to keep the property as a legacy to your children, then you might want to keep the policy if you were using it as collateral for the mortgage the both of you are paying together.

Divorcing with individual life insurance policies is easier than with a joint one. Oftentimes, the ex-spouses are the main beneficiaries of the life insurance policy. This makes it easy because you will only need to change your beneficiary as all insurers allow for such changes for whatever your reasons. 

However, it would be reasonable to have your ex-partner as the beneficiary of your policy if they are the primary giver of your children. Changing the beneficiary applies when there are no children in the picture.

Cash Value

There are two major types of life insurance; term insurance and whole life insurance. Term life is a temporary type of life insurance that does not carry a cash value component. This means that this type of insurance offers only coverage for the beneficiary without the savings component.

On the other hand, whole life or permanent insurance is longterm and provides lifetime coverage which also includes the cash component. Such that when you pay for the premiums, part of it is set aside to accumulate as the savings component of the policy. This cash component is usually shared between spouses during divorce just like any other asset they own.

Premiums

For the policy to remain in force, the premiums have to be paid as before, and this is usually the responsibility of the policyholder. If you are not the one making the payments, then you need to follow up and ensure that they are made on time. 

If the life insurance policy was part of the court decree and the responsible spouse fails to pay the premiums as required, then his/her ex-partner can contact the court to ensure that they are paid.

Also, remember that the insurance company might refuse to pay out the policy to you as the beneficiary under certain circumstances. Don’t put your hopes too high when you don’t understand the fine print of your policy because you might just end up very frustrated. For instance, the policy might not payout if the death of the policyholder lives outside the United States, fraud, or if they die under circumstances like suicide, during an act of war, and so on. 

Is a life insurance policy a marital asset?

Yes, if it is a whole life or universal life insurance policy. These are permanent life insurance policies that accumulate a cash value component throughout the life of the insurance. Part of the premiums you pay for your policy make up this cash value component which you can use Hence, the cash value component makes the life insurance policy a marital asset and is usually shared between the spouses during divorce, just like they do with their other assets.

So both partners are entitled to receive part of the cash value, but the amount each receives could be impacted by different circumstances.

For example, one of the spouses might willingly give up a big part of the cash value in exchange for a big part of another marital asset, eg real estate, business, etc. Both spouses would qualify for a 50-50 share of the cash value if you reside in a community property state. The 50% share of the cash value proceeds might also increase or decrease if you reside in an equitable distribution state, depending on the factors it uses.

Life insurance is sometimes used to protect children and a spouse in marriage, hence the court might require the other spouse to keep the policy.

Can I keep life insurance on my ex-husband/wife?

One of the biggest reasons why people keep life insurance on their ex-husband/wife is when there are insurable interests like child support and/or alimony. It might be voluntary or through a court order to maintain the policy for the same reasons.

Also, if you plan to take out a new insurance policy on your former spouse, then apart from the presence of an insurable interest, they must be willing to undertake the underwriting process and sign the application.

Can an ex-spouse collect life insurance?

Yes and no. Whether an ex-spouse can collect life insurance benefits of the life insurance policy is determined by different things including, the state they live in, the type of policy, and the state the policy was issued.

An ex-spouse can collect the policy benefits as long as the insured spouse didn’t change the beneficiary. So if the insured spouse updates their beneficiary designations listing their ex-spouse as the beneficiaries, they cannot collect the policy benefits.

However, in some states, the law automatically revokes the rights of the ex-spouse named as the beneficiary of the policy benefit. This helps to reduce conflicts common with divorcee’s, where the insured spouse forgot to change their ex-spouse as the beneficiary. Some people are malicious, so if it is ruled out that an ex-spouse committed life insurance fraud, then they cannot collect a payout. Also, some insurance policies are structured to prevent ex-spouses from receiving policy benefits. So it clearly states that the spouse cannot receive benefits in the case of divorce.

Failure to comply with a court order to maintain life insurance?

What happens if the insured fails to comply with a court order to maintain life insurance? Can the court hold them in contempt? First, the insured ex-spouse is considered to violate a court order to maintain life insurance if; they change the beneficiary of the policy, they cancel the existing life insurance policy, or if they substitute another policy.

Most times, a spouse learns of their ex-partner’s failure to comply with a court order to maintain life insurance when they die. As such, a constructive trust whose interest is dependent on the amount of the policyholders’(deceased ex-spouse) obligation can be enforced by the surviving ex-spouse.

When the ex-spouse learns of their other spouse’s failure to comply with a court order to maintain life insurance prior to their death, then they can seek court enforcement for their compliance. This might hold the insured ex-spouse in contempt, but only in three instances.

The first instance is if they were aware of the terms of the order, second, if they purposely failed to do what the order required them to do/ if they purposely did what the order forbade them, and third, if the violated order audibly communicates what should or should not be done.

Hence, the insured spouse is held in contempt if the motion meets these elements but if not, the application to hold him/her in contempt is dismissed. 

Life insurance to protect alimony

The ex-spouse entitled to receive alimony from the divorce settlement can use the cash value from life insurance to protect it. If a cash value does not exist, then a new permanent policy can be taken out to act as protection for the alimony.

Changing life insurance beneficiary during divorce

It is common for couples to name each other as beneficiaries of their life insurance policy during marriage. What a lot of people don’t think about when taking out life insurance is possible life-changing circumstances in the future such as divorce. If you had taken out life insurance with your spouse and listed them as the policy beneficiary, you might want to change that during a divorce if you are the owner of the policy.

If you don’t remove your ex-spouse as the beneficiary of the policy, then they are going to receive all proceeds when you die, even after you went through the divorce.  But there are a lot of factors that might affect this change, and in circumstances, it might be best to leave your ex-spouse as the beneficiary.

In some states, it is illegal to change the beneficiaries of your life insurance policy once a divorce is filed, so don’t proceed without consulting with an expert or your attorney first. You might end up violating state law and paying very high fees to clear the issues. Sometimes, you might come off as the villain in the eyes of the law, automatically making your ex-spouse the victim and the court might favor them even if your intentions were not malicious, to begin with.

Children, who are minors, might be affected by the divorce, and this should be a crucial consideration before you decide to change the beneficiary. Of course, with minors involved, the best decision is to have your ex-spouse as the beneficiary of the life insurance policy. 

Naming your children as the beneficiaries might drag the release of the benefit for years if they haven’t reached a certain age as required by law, mostly 18 years and above. If you die, the policy is supposed to pay out to the beneficiaries and if they are below 18 years, the court is forced to assign a custodian for the children. This might take years on end, putting them through the wringer.

Court-ordered life insurance

During a divorce, a spouse may have legal financial obligations like child support or alimony. To ensure that they comply, the court can order them to buy a life insurance policy or continue paying an existing one to insure these payments for a specified period of time. This is called court-ordered life insurance.

With the court-ordered life insurance, the spouse paying for the policy cannot change the beneficiary or substitute it for another policy. If they must do so, then they will need approval, and the other spouse can seek court enforcement if they fail to comply with the court’s decree for the life insurance policy.

There is usually a deadline to take out a life insurance policy once ordered by the court. And if the order requires a spouse to buy a new policy, then term insurance is the most suitable. The term of the policy should be concurrent with the specified period for alimony or child support requirements.

Can I use Life insurance to secure child support?

Yes! You can use life insurance to secure child support. When going through a divorce, life insurance is part of the major aspects affected, just like other marital possessions and assets. If your ex-spouse is required to pay child support, their life insurance policy can be used to ensure that the whole amount is fully paid within the specified period.

Take Away…

In all situations presented, understanding your current situation and how your life insurance policy will impact your future is important. During a difficult time like divorce, you want peace of mind and a smooth transition, so don’t rush to make any impulsive decisions on your own. A good attorney should help make it easy for you because they understand how the procedure works.