Divorce and Life Insurance: Considerations

    Divorce and Life Insurance: Considerations

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    While you’re going through the process of divorce, life insurance might not be the first thing on your mind. But buying a term or whole life insurance policy, or changing an existing one, could save you some headaches down the road…if done carefully.

    The first careful step is not to make any moves without consulting with your divorce attorney first.  Any change in assets has the potential to derail a divorce proceeding. But considering what the various insurance options are within a proposed divorce settlement should be a priority.

    In fact, it may be required. Many divorce settlements these days are requiring life insurance policies be purchased and maintained to provide for alimony and child support in case the major bread-winner dies while alimony or child support is still owed.

    And divorce is becoming common. According to the CDC, divorce rates hovered around 40 percent from 2013 to 2014, the last years on record. For comparison’s sake, while the number of divorces has dropped from 872,000 in 2006 to 813,862 in 2014, so too have the amount of marriages during that span from 2,193,000 to 2,140,272. So the rate of divorce per capita has actually increased in recent years.

    Before you sign the divorce papers…

    1) Examine potential insurance coverage options

    If it is known that life insurance will be a requirement for one or both parties in the divorce, the parties can each start looking into applying for life insurance.  It is extremely important to make sure that attorneys for both parties are aware and approve of any and all steps you take.

    Prior to divorce proceedings, attorneys will typically take a look at what the financial situations of each person will be.

    It can be difficult to determine the exact amount necessary in a life insurance policy, but a starting place could be to look at the amount of alimony and/or child support you will owe or be owed until the youngest child is eighteen years old.

    This calculator may be helpful in providing you with an insurance estimate in the ballpark of what you can expect. In addition, you should probably become familiar with the categories of insurance—whole life, term, universal, to name a few—and how they may apply to your situation. But it’s always wise to speak with your attorney and a financial professional to help navigate through the many coverage options available.

    For example, an insurance company may offer term life insurance policies at lower premiums than whole life policies or other permanent life insurance because they are limited to a specific time-frame. This may lower the immediate costs of meeting a life insurance protection commitment.

    However, permanent life insurance policies may provide potentially appealing benefits, like the accumulation of cash value. Assuming at some point, you will be no longer required by court to have a policy in place for the sake of a particular set of beneficiaries, you could eventually take advantage of the policy yourself, perhaps to pay for college or to compensate for retirement income lost to your spouse in the divorce.1 (Of course, if you already have whole life or universal life insurance that’s built cash value, these policies may be considered as much of an asset as anything else owned in a marriage).

    2) How long will you need this coverage potentially?

    The period of time for obligatory life insurance coverages may vary because they are dependent on the length of alimony and the ages of the children to be supported. For example, if you’re considering life insurance to help protect a child’s financial future, you may look into term insurance.  These coverage types may be appropriate because they expire at the end of child support obligations.

    3) Defining ownership
    Whether you are considering a new life insurance policy or own an existing one on a soon-to-be ex-spouse before divorce proceedings, you and your attorney should clearly define the policy owner. This is important because the policy owner has the ability to change beneficiaries, rates and insurability, which can help protect your income. It is also possible to sign over the ownership of an existing policy prior to divorce proceedings.

    Note: If you are set to receive alimony, you might also consider including a provision in the divorce settlement that the beneficiaries of the insurance policy cannot be altered without your consent. (And make sure proper procedures are followed so that the insurance company records the restriction).

    4) Determine who pays the premiums
    Assuming there is a life insurance requirement in the divorce decree, it should spell out who will pay the premiums.  It is important to have defined clear terms and responsibilities as it could be detrimental to the beneficiaries if the premiums do not get paid.

    If you have added your ex-spouse to the policy, you may request to receive copies of billing records and lapse notices.

    5) Re-designate beneficiaries
    If you already own a life insurance policy and named your ex as the beneficiary, you may need to take specific steps to change that as part of the divorce process and with the approval of your and your soon-to-be-ex’s attorneys. Otherwise, your ex could become the beneficiary of your policy even if you're remarried.

    For example, imagine a case where a husband names his wife as the beneficiary of his life insurance policy. Then the couple subsequently divorces and the husband did not change the beneficiary in his life policy. If the husband remarries, creates a will and names his new spouse as the beneficiary of his policy in his new will, his ex-wife would still receive the proceeds of the policy (except in states that have an automatic revocation provision upon a final divorce decree).

    You may also need to change other beneficiaries on life insurance policies, annuities, long term care insurance or disability insurance, depending on the divorce settlement. Some of this could get tricky, especially when children are involved. Again, many people opt to talk to an insurance professional to navigate the issues.

    Regardless of how you change your beneficiaries, if you are considering a life insurance policy before divorce proceedings, it is important to review your designations periodically. In fact, it wouldn’t hurt to check beneficiary designations before the divorce process begins, during the divorce proceedings, and after the divorce is final.

    Life Insurance and Divorce Planning

    In addition to the financial and emotional toll, few life decisions are more consequential than divorce. Your finances, investment options, income taxes, retirement plans, annuities and many other factors will need to be examined. But above all, in the event that you or your ex should die, life insurance policy could potentially cover your financial obligations required in the divorce agreement.

    Of course, this advice comes from an insurance company. But it does not change the general wisdom of reassessing your finances during and after divorce.  

    Related Reading: Getting Divorced? Separated? Time to Review or Create Your Financial Strategy

    1 Access to cash values through borrowing or partial surrenders will reduce the policy's cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

    The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.