When you get divorced, there are countless details to iron out during and after the divorce proceedings. You have to decide what happens to your home, what your custody arrangement will look like, and if alimony will be necessary so it’s understandable if some of the smaller details start to slip through the cracks.
One such detail you may overlook when deciding who gets what furniture and if you should sell your vacation home, is what to do with any life insurance policies you or your spouse took out before or during your marriage. While figuring out what to do with a life insurance policy may not be at the top of your divorce to-do list, it should be, especially if you have children who would require financial support in the event the policyholder passes away.
Keep reading for answers to some of your top questions surrounding life insurance and divorce.
Your Top Life Insurance Questions Answered
Even if you or your spouse don’t have a life insurance policy taken out on one another, it may be time to consider it. Yes, even if you’re about to get divorced, it can make a lot of sense to get a life insurance policy that provides financial assistance to you or your spouse in the event one of you passes away. Let’s take a look at what life insurance is, what happens to existing policies during and after divorce, and why you may want to take a policy out on yourself or your spouse now.
What Is Life Insurance?
First things first, life insurance is a type of insurance policy that provides a financial payout upon the passing of the person the policy was taken out to insure. The person who takes out and pays the policy makes monthly premium payments to the insurance company with the agreement the company will pay out an agreed-upon sum to the beneficiary.
Life insurance not only provides financial support, but it can give you peace of mind. In the event of your passing (or whomever you take the policy out on), the beneficiary will receive some level of financial support helping them cover funeral costs and their living expenses.
There are two main types of life insurance policies: term and permanent. A term life insurance policy only provides for a specified period, whereas a permanent life insurance policy lasts for your entire lifetime.
Why Do You Need Life Insurance After a Divorce?
Once you’re divorced and go your separate ways, it may seem odd to maintain a life insurance policy on your ex-spouse or a policy on yourself for their benefit. In some cases, this would be odd, but in many cases, it makes a lot of logistical sense. For example, if your spouse is required to pay child support or alimony payments, then you really need life insurance coverage in the event of their death. If they pass, you will no longer receive monthly alimony or child support payments which can cause a great deal of financial hardship.
Let’s reverse the script. If you’re the spouse paying child support and don’t have primary custody (aka a noncustodial parent), you may want a policy for your spouse to cover the costs of the child care they provide. The noncustodial parent can choose to give a life insurance policy to their former spouse without them having to pay gift tax if they do so before or during the divorce agreement.
Even if you don’t have children and no alimony payments are required, it’s worth insuring a former spouse if you will receive pension or retirement benefits from them.
Who Pays for It?
Who pays for the life insurance policy (or policies if you have one for each spouse) depends on the divorce ruling. In some cases, the noncustodial parent will be required by the court to pay for the policy on their own life. They will then have to name the custodial parent as beneficiary and keep making the monthly premium payments. In other cases, the cost of the life insurance policy will be added to child support or alimony payments and then the beneficiary will pay for the policy. Every situation varies, so it’s hard to say exactly who will be responsible for making the monthly payments.
Even if you don’t have an existing life insurance policy, the court may order that you purchase a policy to provide support to your former spouse. If you want to take out a new insurance policy on your former spouse but are unable to do so, if they have an existing policy, you can request to have it transferred to you as the new policy owner and beneficiary. Either way, if your spouse is the one charged with paying for the policy, you’ll want to make it part of your divorce agreement that you’ll receive proof that the life insurance policy is still being paid for and is active from time to time.
Before you go to court, work with your spouse and respective lawyers to try to come to an agreement surrounding your life insurance policies. If you both agree on what you’d like to happen, you should come to court knowing:
- How long the life insurance policy term should be
- How much coverage to buy if you don’t already have a policy
- Who will own the policy
- Who will pay the monthly premiums
You may need to provide proof of your policy to the court, so you’ll also want to ask the life insurance company or your insurance broker to give you a copy of your signed life insurance application or a receipt of payment for temporary coverage.
Who Should Be Your Beneficiary?
Who your life insurance beneficiary will be may be determined by court order if you have an existing policy. If the court doesn’t decide for you, you can choose to make your children, your soon-to-be former spouse, or your estate the beneficiary. If you decide to change your current beneficiary, all you have to do is give your life insurance provider a call and request to change your beneficiary. In some states, it is a requirement that your life insurance beneficiary has an insurable interest in your life. In other words, you may have to choose someone to whom you have a financial obligation, such as a child or former spouse.
In many states, the divorce decree or state law supersedes a listed beneficiary on a policy, meaning that even if your divorce decree says your former spouse is still your beneficiary, your insurance company may require you to restate this post-divorce in order for it to be valid. If your former spouse was the beneficiary on a policy and the judge does not rule that they must remain the beneficiary, you can choose a new beneficiary if you wish.
Before you name your children as your beneficiaries, it’s important to take their age into account. Life insurance companies are not legally allowed to pay out death benefits to any beneficiaries who are not 18 years of age (or 19 if they live in the states of Alabama or Nebraska). If you pass on before your beneficiary turns 18, the courts will have to appoint a legal guardian who will decide what to do with the life insurance funds. This can lead to the money being tied up for years. If you have young children, you may want to consider one of the following options:
- Choose a custodian to control the funds if you wish the custodian to be someone other than the surviving parent.
- Set up a trust that designates specific assets, beneficiaries, and a trustee to manage the trust.
- Keep your ex-spouse as the beneficiary as they share custody and financial responsibility of your children (you can always change the beneficiary once your children turn 18 if the policy is not in your divorce agreement).
Can I Take out a Policy on My Spouse After We Divorce?
Even if a judge doesn’t add a new life insurance policy to your divorce agreement, you can take out a policy on your spouse after your divorce - as long as your former spouse is willing to participate in a medical exam and sign the life insurance policy. In this case, you will be responsible for making the monthly premium payments, but in exchange, you will gain some much-needed peace of mind that the policy is being paid on time and is still active and in good standing.
Related: Best No Medical Exam Life Insurance
If you choose to take out a policy for yourself or your former spouse after your divorce, you’ll want to keep a variety of factors in mind when deciding how much coverage you need to pay for. Generally, it’s a good idea to purchase a policy that covers a minimum of 10 to 15 times your income, but you’ll also want to take the following financial needs into account:
- Child care and education costs to raise a child up to the age of 18 or to pay for a college education
- Non-child dependents such as dependent family members and aging parents
- Income replacement if your loss of income will affect any of your loved ones or dependents
- End-of-life expenses such as funeral services
Is Life Insurance Considered to Be Marital Property?
Whether or not a life insurance policy is considered to be marital property or not depends on what type of policy you have taken out. If you have a term life insurance policy, it will typically be treated as separate property during a divorce, as you can’t access the financial assets of the policy (aka the death benefit) when the insured is still alive. Permanent policies with cash value can be treated as a marital asset. Technically, the permanent life insurance policy is not considered an asset, it’s the cash value of a permanent policy that is viewed as an asset.
If you choose to take out a policy after your divorce, but still want to name your former spouse as the beneficiary, this would not be considered marital property.
Whether or not you need life insurance after a divorce or what will happen to any existing policies you or your spouse have will depend greatly upon your unique financial needs. If one party is required to pay alimony or child support, it is especially important to consider having a policy that provides financial support in the event of their passing. Your lawyer can help you work through including a life insurance policy in your divorce agreement, but at the end of the day, the judge will have the final say in how life insurance will play a role in your divorce.