Life Insurance and Divorce: Protecting Your Financial Future

Divorce is often a time of profound emotional upheaval accompanied by intricate financial challenges. Dividing assets, covering legal expenses, and determining child support and alimony payments are just a few of the issues that need to be addressed. Amidst these complexities, life insurance may not immediately come to mind;

However, ensuring you have adequate life insurance coverage is a prudent financial move. You will need to update any existing policies to reflect your new circumstances. You may even need to take out new policies to cover financial responsibilities laid out in your divorce agreement. Here is what you need to know about life insurance and divorce.

What to Do With Existing Life Insurance

If you already have a life insurance policy, here are several things to consider during your divorce process.

Beneficiaries

A life insurance beneficiary is the person who receives the death benefit if you die while the policy is active. If your spouse was previously listed as a beneficiary, you will likely need to change that following your divorce—except in certain situations. For instance, if you have an amicable separation and minor children are involved, you might want your ex-spouse to receive the benefit to help care for the children after your passing.

Bear in mind that in certain states, an ex-spouse may be automatically removed as a life insurance beneficiary after a divorce. This is termed “revocation upon divorce.” If you want to keep your ex-spouse on your policy, speak with a lawyer about your choices.

You might consider listing your children as beneficiaries. However, insurers generally do not pay life insurance benefits directly to minors, so naming one in your policy can result in delays and paperwork. Instead, designate a trust as the beneficiary for your children and name a trustee to distribute funds according to your wishes. An estate planning lawyer can assist you in establishing a trust.

If there are no children involved, you can select any new beneficiary you want, which might be a relative, friend, charity, or your estate.

🤓Nerdy Tip: If you or your spouse has already filed for divorce, consult your attorney before updating your beneficiaries. Some states prohibit changing beneficiaries until after the divorce is finalized.

Cash Value

If you or your spouse holds a permanent life insurance policy, the policy’s cash value may be considered a marital asset and therefore subject to your divorce settlement agreement. In some cases, you may want to cancel the policy and split the cash surrender value, although fees and taxes may apply.

There might be other possibilities as well. For example, one spouse could retain the policy and offer different assets to the other spouse to compensate for the lost cash value. Reach out to your insurance agent or carrier to explore your options.

Joint Life Insurance Policies

Some individuals possess joint life insurance—a policy that covers two people. If you and your spouse share a policy, check whether it includes a rider allowing you to divide it into two individual policies in the event of divorce. If not, consult your life insurance agent or lawyer.

New Life Insurance After a Divorce

A divorce can lead to significant changes in your financial circumstances, increasing your need for life insurance. If you do not already have coverage or if what you have is no longer sufficient, here are a few factors to take into account.

Alimony and Child Support

Divorce can result in ongoing financial obligations to your former spouse. For example, divorce settlements often require one parent to pay child support to the other. Alimony payments from one spouse to the other are sometimes mandatory regardless of whether children are involved.

Some of these obligations may end if the individual making the payments dies. “Judges can rule that a term policy be purchased to provide security for child support or alimony payments,” according to Mia Frabotta, a family law attorney at McCarter & English LLP in Boston.

Life insurance terms can vary, from a period shorter than five years to over 30 years—long enough to last until a mortgage is paid off and children complete college. Once the term ends, the policy will expire, and you will no longer have to pay premiums.

“You can customize life insurance obligations to coincide with the end of your support payments,” Frabotta says. “It’s a good way to make sure the policy is only intact for the obligated amount of time.”

Addressing the Loss of a Primary Caregiver

It may be a good idea to buy life insurance after a divorce even if you do not pay child support or alimony—especially if you are a primary caregiver. Imagine if you were to pass away before your children reached adulthood. Your ex-spouse might need extra money to pay for their care.

What if your ex-spouse will not be helping with future child care? Following your divorce, if you are effectively a single parent, having life insurance is even more critical. You will want to choose a potential guardian for your children and leave enough money for their care. One solution might be a term life insurance policy that covers you until the youngest child reaches adulthood, with the guardian as the beneficiary. Another option might be a trust for your children. Then make it the beneficiary of your life insurance policy. You would then name a trustee to ensure your life insurance payout and other assets are distributed according to your wishes after you pass away.

For assistance with these choices, consider contacting an attorney with experience in estate planning.

College Costs and Mortgages

You might have started saving for your children’s college expenses during your marriage. Divorce settlements often stipulate that you and your ex-spouse continue to share this responsibility after you split up. What happens if either of you dies? Having life insurance can ensure that these costs are covered.

You might also consider buying life insurance if you are still living in the marital home with your children. This way, if you die, your ex-spouse, or another guardian you choose, can pay off the mortgage and keep the house. Again, an estate planning lawyer can help you make sure your wishes are followed after your death.

Beneficiaries

When you own a life insurance policy, you can name—and change—beneficiaries. This situation can be a source of mistrust in divorced couples. To address these concerns, divorce agreements can require that ex-spouses be allowed to verify that policies are paid up and the correct beneficiaries are named. Another option: You can own a policy on your ex-spouse and name yourself the beneficiary. With this arrangement, you would be responsible for paying the premiums and naming the beneficiary. However, this route cannot be taken without your former spouse’s cooperation.

How Much Insurance to Get After a Divorce

If you do not owe alimony to your former spouse, you do not have children, and there is no one depending on your income, you may not need life insurance at all after your divorce.

However, if your divorce has left you with financial obligations—such as child support to pay or a mortgage for which you are now fully responsible—life insurance is probably a good idea.

Your divorce settlement might specify the quantity of court-ordered life insurance you are required to purchase and for how long you have to keep it. Otherwise, you can choose your own coverage limit.

To decide how much life insurance to buy, consider who depends on you and for how long. Ask questions like:

• What’s my mortgage balance, and how many years are left?
• How much alimony and/ or child support am I required to pay?
• How much will my children’s college education cost?
• If I passed away, how much would it cost to replace my income (or to pay for child care)?

Add these figures up to get a sense of your financial obligations. Then consider how much money you have in savings and other assets to meet those obligations. Subtract your savings from your obligations, and buy at least enough life insurance to cover the gap.

Frequently Asked Questions

• Is life insurance a marital asset? It depends. Because whole life and other permanent insurance policies have a cash value component, they’re often treated as marital assets to be split up in a divorce. But term life insurance policies, which don’t have any cash value, generally aren’t considered assets.
• Can you change your life insurance beneficiary during a divorce? In some states, if divorce papers have already been filed, it’s illegal to change your beneficiaries until the divorce is final. Consult a divorce attorney to be sure you understand the laws in your state.
• Can a judge order me to buy life insurance after a divorce? Yes. This is called court-ordered life insurance, and it’s designed to make sure you meet the financial obligations of your divorce settlement even if you die. For instance, you could be required to maintain a life insurance policy until your child turns 18.