Divorce and Life Insurance: What You Must Know
To ensure you and your children are protected, here are our tips and advice on divorce and life insurance: what you must know
Divorce is always complicated, and emotions are likely running high. The impact getting a divorce will have on your life insurance policy probably isn’t at the top of your list of concerns in the face of splitting your household and ensuring any children involved are adjusting to the change. However, it’s essential to consider what a divorce means for your life insurance policy.
Life Insurance as a Marital Asset
Your life insurance policy may or may not be counted as a marital asset when you and your ex-spouse’s finances are being split. A term life insurance policy, meaning a policy that only covers you for a specific period, won’t. A whole life insurance policy, on the other hand, could.
Whole life insurance policies accumulate cash value because part of your monthly premium payment is put into a separate fund. The money in this fund counts toward your net worth.
There are a few things you can do if your life insurance policy has cash value. In some cases, cashing out on the policy and splitting it evenly between you and your ex-spouse may be the way to go. If you have a prenuptial agreement or reach a different agreement during the divorce, your circumstances might differ.
Protecting Your Children
Getting a divorce is a long and arduous process, even when you don’t have children. If you do, it’s likely to be twice as exhausting.
Young children may not understand what’s going on, while older children may be resentful or angry. A custody battle may ensue. No matter what, it’s not going to be easy.
Whether your divorce was amicable or messy, your children are still you and your ex-spouse’s primary concern. You both want what’s best for them, and that means protecting them financially.
Life insurance is a great way to do that. It can function as a way to guarantee child support or alimony, protect the children if anything happens to their primary caretaker, or pay for college if one or both parents pass away.
Child Support and Alimony
A divorce can have devastating financial consequences for one or both parties. Even excluding legal fees and splitting marital assets, the shift from living in a two-income household to relying on a single income source is enough to cause drastic changes to you and your children’s lifestyle and expectations.
Child support and alimony payments help the parent with primary custody of the children provide necessities and even college savings. Those payments disappear if the parent providing them passes away. That’s one of the ways a life insurance policy can help.
If you receive child support or alimony from your ex-spouse, consider taking out a life insurance policy on them. Ensure that the death benefit you will receive is enough to replace the payments you would lose if they passed away.
Your ex could purchase a policy for themselves with you named the beneficiary, but if you don’t trust them to maintain the policy or make payments on time, it’s best to do it yourself. If your ex owns the policy, they may be able to make changes to it without you knowing, which may prove problematic too. If you’re the one taking out the policy, remember that your ex still has to consent to you doing so.
Depending on your circumstances, a court may decide a life insurance policy should be part of the spousal support agreement resulting from your divorce. If that’s the case, it’s going to mean a lot of time talking to you and your ex’s lawyers and consulting with insurance agents. However, it’s meant to make sure your children are taken care of financially no matter what, so it’s worth it in the end.
Life Insurance as a Single Parent
Sometimes, a divorce may result in someone becoming a single parent. That may be better and safer for the parent who has custody of the children and the children themselves in the long run, but it can make planning for the future a challenge.
If your children are minors and you find yourself raising them alone, it’s vital that you have life insurance to support them if something unexpected happens to you. As a general rule of thumb for calculating the size of the death benefit you should aim for, take the number of years until your youngest turns 18 and multiply it by your average income after taxes.
If you want to be extra cautious, use the number of years before your youngest child turns 21. Policies with larger death benefits generally have higher premiums, so you’ll have to find the balance between affordable premiums and a large benefit that will ensure your children are financially secure. That can be difficult, but it’s necessary and worthwhile.
Changing Your Beneficiary
If you had a life insurance policy before your divorce, your spouse was likely named your primary beneficiary. Now that you’re no longer together, you may want to change that, mainly if there are hard feelings or you don’t have children.
In some states, your ex-spouse is automatically removed as your primary beneficiary after your divorce. In others, they remain.
Do your research or consult an attorney or your insurance company to determine what laws apply to you. Whatever the case, you should update your policy to reflect your wishes as soon as possible.
In most instances, changing your beneficiary is a simple process. Contact your insurance agent, and request a change of beneficiary form. Fill it out completely, and return it to your agent.
Once the form is filed, your new beneficiary or beneficiaries will be on record with your insurance company. It’s as easy as that, which is a relief for many people.
When filling out your new form, make sure to specify your new beneficiary by their social security number. This will prevent future confusion or difficulty determining who you meant.
The exception to the beneficiary changing process is when your ex-spouse was named an irrevocable beneficiary on the policy. That complicates matters, but don’t panic yet.
If your ex-spouse was named an irrevocable beneficiary, they might have the right to veto any changes to your policy. This is including canceling it or removing them as the beneficiary.
Your situation will depend heavily on the state you’re located in, as state laws vary widely. No matter where you are or how bitter your divorce proceedings are, don’t lose hope. Your insurance agent and divorce attorney can help you decide how to handle a situation like this.
You may not have gone into divorce proceedings having or acting as an irrevocable beneficiary, but that could change. In some instances, when a life insurance policy is required as part of spousal support, the person receiving child support or alimony will be designated as an irrevocable beneficiary. That’s one way that courts can help guarantee child support and alimony if something happened to the person providing it.
Children As Beneficiaries
If you want to remove your ex-spouse as the primary beneficiary, you need someone with whom to replace them. If you have children, they’re probably the first people that come to mind. Unfortunately, they may not be the best choice.
Life insurance companies cannot pay a death benefit to anyone under the age of 18. Or 19 if you’re located in either Alabama or Nebraska. If you pass away before your children reach 18 or 19, the legal proceedings to determine who is in charge of the funds could get expensive and last for years.
Several other options might be safer. The easiest, of course, is to leave your ex-spouse as your beneficiary.
If you don’t trust your ex-spouse or they’re not a safe option for you or your children, you can specify a different custodian in your policy. Make it clear that the custodian should not be your ex-spouse if that’s the case.
A Final Option
The final option is to set up a trust and name it as your beneficiary. While this might entail a few extra steps, many people prefer it. You still have to designate a trustee. But they are legally required to administer the trust the way you have specified.
In addition to allowing your children to receive payments over time, naming a trust as your beneficiary has other benefits. Depending on your financial situation, it may help you avoid the estate tax. It can also keep your estate out of costly and time-consuming probate.
Whether you’re looking for a new policy to reflect your new circumstances or merely have questions, seeking expert advice on how getting a divorce will influence your life insurance requirements is never a bad idea. At NextGen Life Insurance, we’re here to support you. Get your free quote today, or call us at 646-216-4199 to get started.