Life Changes and Life Insurance: Divorce

Divorce could mean making changes to your life insurance. This could mean changing beneficiaries or insuring income for the ex and children Here’s everything you need to know about life insurance after divorce.

Unfortunately, millions of marriages end in divorce each year. Divorce impacts almost every aspect of one’s life, including life insurance.

We know, it’s easy to forget about life insurance while dealing with the whirlwind of changes brought on by a divorce. The truth is, this can have major monetary consequences. Sorting out and securing your finances is one of the most important tasks to accomplish during a divorce.

We’ll help you lay the groundwork for the changes you’ll need to make to your life policy in the event of a divorce.

Understanding the Divorce Timeline

There are many nuances in the divorce process. There is an initial petition for divorce that a lawyer files with the court. From there the other spouse receives a summons to make sure they are aware. They will get a few weeks to respond to it.

The couple then goes through a discovery process before they reach a settlement. They either settle, or the case goes to trial.

Discovery is where couples exchange documents and other information on their personal lives, and finances. This includes things like income, real estate, and savings and checking accounts. They also disclose information on assets like vehicles, retirement funds, and life insurance.

You’ll want to make it known which type of life policy you and your spouse have. This includes whether it’s a joint policy. Also reveal whether you got a group policy through work, or if it’s an individual policy.

Discuss if it’s a term or whole life policy, and how much money you’ve borrowed against it. You’ll also want to review the beneficiaries of the policy.

Why Life Insurance is Important

Life insurance provides funds to your beneficiaries after you pass away. It provides them with a financial cushion to help them pay their expenses by replacing your lost income. There are two types of policies. There’s term life, and there’s whole life.

Term life covers you for a pre-determined period of time such as 10, 20, or 30 years. If you don’t pass away during this period, your beneficiaries won’t receive a payout.

Whole life policies are more expensive, but protect you for your entire life. You can also borrow against your policy if you find yourself in a financial bind. For more information about the two, check out our article on term and whole life insurance.

If you have people who rely on you for income, or you have credit card debt, car payments, mortgage loans, or other debts to take care of, it’s a good idea to keep your life insurance policy even after your divorce. What if you pass away before you pay these outstanding debts off? Life insurance provides your beneficiaries with the funds to do it for you.

Beneficiaries

A beneficiary is someone who receives the pool of money from a life insurance policy when the policyholder dies. People tend to designate immediate family members as beneficiaries, although you have some ability to designate others, provided that they have what is called “an insurable interest” in you. What this means is that only those who would suffer a direct financial loss due to someone else’s demise may be a beneficiary of their life insurance policy.

Spouses usually include each other and their children as their beneficiaries. However, when they go through a divorce, they’ll most likely want to change that aspect of their policy.

Policies are either revocable or irrevocable. Revocable policies allow you to add or remove beneficiaries without the other party’s consent. Irrevocable policies mean you’re not able to.

If the policy’s revocable, you’ll want to contact your insurer for help with the process of removing beneficiaries. However, you may only be able to remove your spouse from the policy if they don’t need financial support.

Things get much more complicated when you have children younger than 18, or if your ex-spouse still depends on you for income.

Alimony Payments

Alimony payments, otherwise known as spousal support, are monthly payments to your ex-spouse. You are usually obligated to pay them if you earn more money than your former partner. A judge will usually decide on how long you must make these payments.

Life insurance is important to alimony payments. The court may require you to include your ex-spouse as a beneficiary if they are receiving financial support from you. If you pass away and they on you for alimony, they’ll still get monetary compensation under your policy.

Examples of when life insurance comes into play is if your spouse has a disability and relies on you for income. Or maybe you have two children together. If you die, they won’t be able to take care of the kids on their own.

Just like with married couples, life insurance is important for divorcees. Especially if your ex-spouse and children still rely on you for support.

Supporting Children after Divorce

If you write your children in as the primary beneficiaries and you die—they might not receive death benefits right away. This is because minors cannot legally be the beneficiaries of a life insurance policy. They need a legal guardian to take care of them, and the money, until they are 18.

If you and your former spouse share custody, they will be the guardian. And if they don’t have custody and you don’t designate a guardian in your will, the court often appoints one.

Let’s say the divorce ended on bad terms and the court granted that you must leave your ex-spouse as a beneficiary until they are financially stable. To make matters worse, you must share joint custody. But what if you don’t trust your ex-partner to take care of your children if something happens to you?

In this case, you may be able to name another party as the co-beneficiary with your former spouse. Speak with an attorney for further information on this topic.

If you are the one receiving benefits from your ex-spouse, you’ll want to make sure they won’t skimp on paying the monthly premiums. Not paying premiums can also invalidate a policy. This is why it’s important to stay up to date with each other’s finances. Review the policy provisions with them each year. In the worst case scenario, you can always hire a mediator or lawyer to help with the process.

In some cases the court won’t order you to keep your spouse on your policy. If you don’t think they’d be a good guardian to your children, the best method would be to buy a policy on your own, and increase the coverage high enough for your children to survive financially without you. You can then designate a new legal guardian in your will.

If you’re shopping for a new life insurance policy, QuoteWizard can help.

FREQUENTLY ASKED QUESTIONS

Q: If I forget to take my spouse off my life insurance policy during the divorce, what will happen?

A: Because divorce is a strenuous and financially revealing process, it’s hard to skip over life insurance during the discovery process. But sometimes more pressing financial concerns will overshadow it.

If nothing is at stake like alimony or child support, you’ll get to manually remove your spouse from your policy. Remove them as soon as you can, because if you forget and end up passing away, they will receive all of the policy’s death benefits.

Q: What’s a trust and a will? How are they different from a life insurance policy?

A: A trust is when one party leaves their property or assets to another party. This can be done while the grantor or trustor is still alive (living trust), or after they die (testamentary trust).

A will is a document that states who will inherit specific property and assets when you die. It also states who will become the guardian of your children, if they are minors and under 18.

Life insurance policies provide money to your beneficiaries after you die. Trusts and wills do too, but also determine specific tangible items one will inherit.

Q: If I want to take my ex-spouse off my life insurance policy but don’t want to get rid of the policy, what are my options?

A: If you don’t have any children, and your spouse doesn’t rely on you financially, you might not need a life insurance policy. However, if you have others you want to provide money to after death, or need to pay off a mortgage, you can designate your estate as the beneficiary of your policy.

From there the insurers will distribute the money on to the beneficiaries in your trust, or will. It’s wise to be cautious about naming your estate as a beneficiary, because you end up paying a lot of taxes and administrative fees before anyone receives the money.

Q: If you and your ex-spouse decide to exchange a whole life policy for actual cash value, how does this work?

A: In the case that you and your spouse were co-beneficiaries of your policy and don’t have children, you’ll have to decide how to terminate it. If you have a term life policy, you can cancel the policy, but won’t receive any payout.

Whole life policies come with an actual cash value that accumulates interest from the monthly premium payments. You can waive the policy’s death benefit and take the actual cash value.

If you have a whole life policy and don’t have dependents, you might want to take out the actual cash value and split it—especially if there isn’t a reason to maintain the policy.

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Life Changes and Life Insurance: Getting Divorced