Life Insurance For Divorce

July 6, 2020
Jonathan Fritz
B.A. Risk Management
Life Insurance Agent

life-insurance-divorce

When two people get divorced, there are a lot of issues that need to be resolved as part of a final settlement agreement.

Child custody and support, alimony, and a division of assets are often where the biggest battles are fought, and they can have a trickle-down effect on other parts of a settlement as well.

Without a doubt, the most significant practical concern when one home is divided into two is making sure you and your loved ones are financially protected.

That makes the issue of life insurance an essential part of the discussion during and after divorce.

Why is life insurance ordered in a divorce?

In cases where one spouse is the primary breadwinner, or the other spouse has primarily contributed by being a stay-at-home parent, courts will often order that life insurance coverage is part of a settlement agreement.

It's one thing to address the day-to-day needs or the month-to-month needs of children and an ex, but quite another to plan for their long-term needs as well.

Keep in mind that when a spouse providing alimony and child support passes away, that support also passes away with them. Life insurance is ongoing protection to avoid a financial freefall when an emergency of this type strikes.

Courts order life insurance to protect a surviving single parent and his or her children. 

As you might guess, having to buy a life insurance policy for your ex doesn't always go down easy, and some people balk at the idea. That is the exact reason why a smart family law attorney will make sure it's part of the negotiations and final settlement agreement.

In fact, it's common in cases where alimony and child support are ordered to also include a life insurance policy as well, naming an ex as the beneficiary.

How long you could be required to pay for a policy depends on what the policy satisfies. 

For example, if the goal is to protect child support, you could be required to keep the policy in place until a child is no longer a minor. Laws vary from state to state. In most cases, that age is 18, and in others, it’s 21.

If life insurance is required only to protect alimony payments, the policy would need to stay in effect for as long as alimony is required. Depending on the length of the marriage and the laws of your state, this could be just a few years, or it could continue for the rest of your spouse’s life.

It’s also good to point out that in some cases, both parents may be required to get a life insurance policy to protect their children. This can easily be the case when both parents have good incomes and can provide added protection for their children.

Specifics for buying life insurance that has been ordered in a divorce

Here are some of the specifics you’ll need to address when life insurance is ordered as part of a settlement agreement. 

The time frame for getting a policy

Ideally, underwriting should take place before a final settlement is put in place. The main reason for this is because if there are existing health issues or other reasons such as a prohibitive premium cost, they can be identified and resolved before a final settlement. 

In cases where you can't get a policy with reasonable terms, you may need to consider setting up a trust or implementing other estate planning strategies.

Underwriting can take up to six weeks or more when an exam is required. You might have the option of going with a no-exam policy. In this case, you could be covered in as little as 72 hours. 

A seasoned life insurance broker will be able to walk you through the options available to you.

Coverage limits

Many times, the court will decide how much coverage is needed. If you can, it’s usually better to try and negotiate life insurance terms on your own so that you have more overall flexibility.

If the goal is to protect children in the relationship, then one way to calculate the amount is to take the current age of each child. From this, subtract that from the age they are no longer considered a minor in your state (or if other laws govern how long they can receive child support), consider adding in costs for college, and then come up with an amount. For example, if a child is 8 and must be protected through age 18, then 10 years of life insurance would be required, along with college costs.

Also, a death benefit does not need to be used immediately. It can be put into a 529 plan and banked for future college costs. 

Coverage for alimony is often included as well. That will require a separate calculation based on how long maintenance is required as part of the settlement.

The overall amount of insurance required would be related to the extent of the obligation. One important thing to note is the amount may be influenced to some degree by the financial impact of paying insurance premiums.

If you or your ex don’t currently have life insurance coverage, it's probably smart to get policy and rate comparisons early. That way, you'll have a good idea of what to expect in terms of coverage and costs.

One important thing to note is the companies issuing express issue plans will offer you up to $1,000,000 in coverage before requiring an exam. If you are required to carry more than $1,000,000, you can either take the exam or purchase two no exam plans.

Coverage length

Term life insurance is generally written for 10, 15, 20, or thirty years. Whole life is written to provide coverage until death. 

The length of the policy is going to be determined by what is stated in the draft settlement agreement.

Keep in mind that coverage can lapse at any time premium payments are not kept current.

Beneficiaries

Unless it is explicitly spelled out in a divorce, the owner of a policy has the right to change the beneficiary at any time. This means you could be left out in the cold if you're not paying attention to this part of the settlement.

Some parents may consider naming children as a beneficiary of a life insurance policy. When this happens, any payouts will be placed into an account governed by the Uniform Gifts to Minors Act. It is a way to transfer assets to a minor without going through the formal process of setting up a trust. The catch is that an adult custodian manages the UMGA account until the minor comes of age (18 years old in most states). Only then can the child assume control of the account.

If a custodian is not named on the beneficiary form, then the court will appoint a custodian, and it may not be the surviving parent. It could be an attorney or another third party.

If a trust or trustee is listed as a beneficiary and no trust exists, then the policy is paid to the policy owner. In many cases, the owner will be the insured, and this means the policy will be paid to their estate.

Ownership

This can be a bit tricky. If you have an ex who is responsible and trustworthy, then he or she may choose to be the owner of the policy and name you as the beneficiary.

However, the best way to protect yourself from nonpayment of a premium and cancellation of the policy is to own the policy and pay the premium yourself, accounting for the premium payment as part of an overall alimony or child support payment. 

In a divorce, a beneficiary should receive premium notices to ensure that the policy is kept current and active. A “proof of insurance” should also be required each year as another safeguard to ensure the policy does not lapse. 

If an ex stops making payments, after the beneficiary is notified, they can take appropriate steps to ensure the ex meets their legal requirements. Sometimes, this can involve appearing before a judge who may impose penalties for noncompliance.

Advice for handling existing life insurance during a divorce

If you already have one or more life insurance policies in place during a divorce, here are some good things to know.

What happens to existing life insurance in a divorce?

A life insurance policy remains in force, regardless of your marital status. As long as premiums are paid, and the policy is not cashed out, it is still a valid form of coverage.

Changes can be made as part of a settlement agreement. However, a divorce does not automatically remove an ex-spouse from the policy. 

Changing beneficiary after a divorce

If your divorce was particularly ugly, and you're not bound by alimony or child support issues, then you will probably have no good reason to keep your ex as the beneficiary on your life insurance policy.

The easiest way to change a beneficiary on your life insurance policy after a divorce is to contact your life insurance agent. He or she will assist you in the appropriate steps and paperwork to make the switch. You can also contact the carrier directly. Many allow you to change beneficiaries online, but some require you to mail your changes.

Most policies are revocable, mean that you are allowed to change the beneficiary of the policy at any time. However, some policies appoint irrevocable beneficiaries, and that means once a beneficiary has been named, it cannot be changed. 

Accounting for cash values

As you pay premiums, whole and universal life insurance policies are set up so that cash value accumulates over time. A portion of what you pay is set aside and invested into a fund that grows with interest. This is known as a policy’s cash value.

The cash value is your money, and you have the option of canceling your death benefit and withdrawing the money for other purposes.

In a divorce, the cash value of your life insurance policies is part of your net worth, and this is usually considered a marital asset. That means, in most cases, it will need to be divided or used as a counterbalance against other assets in a divorce. How much you may be entitled to depends on the specific property division laws of your state.

Modifications after your divorce is finalized

In some cases, you may be able to go back and seek coverage through a life insurance policy for you or your children long after a settlement has been reached. 

While this can be an uphill battle, you can go back to court and ask for a modification. You'll need to present solid reasons why things have changed that justify your request.