Although you may not have thought of marriage and life insurance as being similar to each other, it’s hard to deny the overlap. After all, both are contracts that you enter into out of love for someone else. And when signing both contracts, you do so with hopes for a long and happy life — but also with the understanding that the worst could happen.
You don’t get married with divorce in mind, just as you don’t look to buy the best life insurance expecting to die anytime soon. However, our plans have a way of shifting gears at times, which is why it’s important to know exactly how to deal with a life insurance policy during, and after, a divorce.
What happens to life insurance in divorce?
Apart from the obvious emotional aspect, divorce can be overwhelming simply because there are so many things to consider. You have to worry about how divorce will impact your finances, personal and shared debt, and any assets that either (or both) of you hold. Depending on which state you live in, each of these can be approached differently in the courtroom.
So, what happens to your life insurance in divorce? Well, that depends on:
- Where you live (each state has its own divorce laws)
- What sort of policy you own (cash value and term life insurance policies can be viewed differently)
- How the policy was purchased (whether it is an employer-provided plan or one purchased through a private life insurance company)
- When your policy was purchased (whether you brought it into the marriage or it was fully purchased with marital funds)
You’ll also need to take your specific situation with your soon-to-be ex-spouse in mind. Are you in the midst of an ugly battle with someone you hope to never see again? Or are you on good terms with the other parent of your children and want them to be provided for in the case of your death? Either is possible and can help dictate how you approach your policy.
In some cases, though, a life insurance policy that you considered to be your property may very well come up in divorce court as an asset.
Is life insurance considered a marital asset?
Each state handles marital assets in divorce differently, and this is certainly the case when it comes to life insurance.
If you live in a community property state (Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin) and marital funds were used to pay life insurance premiums, odds are that the policy will be considered a marital asset to some degree. This is especially true when it comes to cash-value life insurance policies, which can be considered an investment and accrue a measurable value over time.
Depending on where you live, when the policy was purchased, and when premiums were paid, your life insurance policy may very well be considered a marital asset in your divorce.
Life insurance: 5 things that may need to change after divorce
Post-divorce, you’re already dealing with changes to your home address, bank accounts, and for some, even your last name. There are a few life insurance changes you’ll need to be sure to make while you’re at it, though.
Although you can name anyone as your life insurance beneficiary, most married folks would name their spouse. Once you’ve divorced, however, this may change.
In some cases, your ex-spouse’s designation as beneficiary will be automatically voided upon divorce. If you want them to receive the policy’s benefit upon your death, however, you may need to redesignate them as beneficiary with your insurer. It would also be wise to note this in your divorce decree and last will, just to be safe.
If you want your minor children to receive the death benefit payout, you’ll need to either designate their parent as the beneficiary or set up a trust/custodian to manage the funds on their behalf.
If you have minor children who would be receiving life insurance proceeds following your death, you will want to consider the value of naming a custodian and/or establishing a trust for the funds.
Your children’s surviving spouse or designated guardian can act as custodian of their money, but they don’t have to be one and the same. The custodian can be any other trusted adult you choose, and they don’t need to be physically caring for your children for you to name them as custodian of their account.
A custodial account can be quickly and easily established, thanks to the Uniform Transfers to Minors Act (UTMA). All you’ll need is your child(ren)’s Social Security number(s) and the name of your designated custodian. Be sure to also add this person to your will, if you have one, and your life insurance policy.
Although it’s a bit more involved, you might also prefer to establish a trust for your beneficiaries, in order to hold and help manage life insurance proceeds. Trusts can be complicated and have many variables, so you’ll want to consult with a financial or estate planner to see which would be right for your situation.
3. Coverage amounts
Many factors go into determining how much life insurance you need to buy. After a divorce, however, your life insurance needs may change, prompting you to adjust your life insurance coverage amounts.
For instance, you might have considered the mortgage on your and your former spouse’s marital home in your calculations, or other shared financial obligations. You might have factored in the replacement of your income for a set number of years, so your spouse would have been able to grieve without financial worries. In either case, you may now determine that you don’t need as much coverage.
You might actually discover that you need more life insurance now that you have split, depending on your financial situation. This is especially true if you have children and want to provide for them until they are grown, or if you are required to buy coverage for court-ordered child support or alimony payments as part of a divorce settlement.
4. Type of insurance
Following a divorce, you may want to change the type of life insurance coverage you hold. In some cases, you might even want to purchase a new policy.
For instance, you could buy a term life policy for a set number of years, until your alimony obligation expires or your minor children turn 18 (or 21). You could also purchase a whole life insurance policy to protect assets for your children — such as paying off the mortgage on your home — as your former spouse would no longer fill that role following your death.
5. Your will
When it comes to money and divorce, it’s always wise to check all of the boxes, just in case. That means updating your will, especially as it concerns life insurance proceeds, even if you have already updated the policy itself and/or included this in your divorce decree.
This means mentioning your desired beneficiary (particularly if it will remain your former spouse), whether you have established a trust or custodial account for your children, and any other directives that your loved ones would need to know.
FAQs about life insurance and divorce
What is court-ordered life insurance?
In some cases, a divorced spouse may be ordered by the court to purchase or maintain life insurance coverage. This policy can be intended to cover child support for minor children or to protect an alimony settlement if the paying spouse dies unexpectedly.
Is court-ordered life insurance taxable?
If you are required to hold an active life insurance policy as part of your divorce agreement, in order to protect alimony payments for your former spouse, the premiums on that policy are considered tax-deductible. A life insurance policy that is court-ordered on your children’s behalf, however, does not fall into the alimony category, so these premium payments are not tax-deductible.
Does a divorce decree override a named beneficiary?
In many states, a divorce will automatically void any spousal life insurance beneficiaries. This is to protect the policyholder and/or insured, so an ex-spouse doesn’t inadvertently receive a payout.
However, if you intend for your former spouse to remain the primary beneficiary — either as part of your divorce settlement agreement or to receive benefits on behalf of your children — you can redesignate them with your insurance company. Depending on your state, you may also need to include this directive in your divorce decree, to ensure your wishes are followed.
Is cash value life insurance protected in divorce?
Generally, cash value life insurance policies are considered when calculating marital assets in a divorce. Different states have different laws on this, but you can typically count on the value accrued by the policy during the marriage as being part of the marital asset pool. This is especially true in community property states.
The bottom line on life insurance and divorce
As a divorcee with a life insurance policy, I can say that both topics are fairly uncomfortable to consider. In life, though, things sometimes take an unexpected turn, which is why it’s important to always be prepared for the worst-case scenario.
Your life insurance policy’s value may be up for grabs during a divorce; it depends on so many personal factors. And you may find that your divorce even dictates the policy and/or coverage that you hold after your marriage is dissolved.
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