Understanding life insurance after divorce
Are you wondering how the court will likely deal with your life insurance? Perhaps your spouse owns the policy. You may wonder if you can remain the beneficiary.
Let’s discuss those questions and several other life insurance considerations after divorce.
Life insurance considerations after divorce
Updating beneficiaries
It’s not uncommon for the spouse to be the beneficiary of a marriage partner’s life insurance plan. It’s a way of caring for a loved one even after death. The insurance benefit could help pay for housing, car payments, and other obligations. But after a divorce the policy owner may not want the ex-spouse to remain the beneficiary.
Some states automatically remove the spouse as a beneficiary following a divorce. In other states, the policy owner must request the change.
In either case, you’ll have to name a new beneficiary. Typically, a parent will choose one or more children. Naming a new beneficiary is a simple process. Speak with your insurance representative who’ll help you complete the necessary paperwork.
It’s important to change the beneficiary as soon as possible. If you die before making the change, the payout will go to the listed beneficiary. You may have preferred that the money go to your children instead of your ex-spouse, but no one can change a beneficiary after the insured person passes.
In some cases, the divorce is on friendly terms. So, some spouses might keep their ex-partner as a life insurance beneficiary after divorce.
Keeping a policy on the ex-spouse
What happens during divorce if you own a policy on the life of your spouse? In some states, you can keep a policy on an ex-spouse after divorce. You’ll have to check with your insurance agent where you live.
But most courts in the U.S. won’t allow you to keep such a policy. Most states don’t view you as having an insurable interest. An insurable interest means you would suffer financial hardship if that person passed away.
This doesn’t mean that the ex-spouse will be without insurance. The court’s rules on divorce and life insurance could have certain requirements. For example, one or both spouses may have to buy new policies.
The court may decide whether you keep or share a policy
There are two major types of life insurance: term life and whole life insurance. Generally, a court won’t divide a term insurance policy. If you own a term policy, it’s often yours to keep.
A court may act differently on whole life insurance. That’s because whole life policies may include cash value. A part of each monthly payment goes into a special account for you. Your insurance company refers to this money as your account’s cash value. It grows with each payment you make and can gain interest.
The court could determine that the policy’s cash value is joint marital property. If so, the court divides the money from the policy between the ex-spouses. In some states, the ex-spouses each would get half of the value. In other states, the divorcing couple may divide the cash value another way.
Certain divorce settlements now must include life insurance
Divorce can be especially difficult for the family when only one spouse has income. There are also added challenges when the family includes dependent children. Alimony and child support can help, but they’re not always reliable.
For example, if the money-earning spouse dies, both alimony and child support could end. Some divorce settlements now require the money-earning spouse to carry life insurance. In the event of that person’s passing, the policy could provide financial support to the family.
Life insurance can help minor children
Child support can last for many years. If the higher-earning parent passes away early, the children will likely need financial support. A life insurance policy could help replace missing child support payments.
Primary custodial parents use regular child support to help with daily needs, such as groceries, clothing, and general care. Without this support, children can suffer.
Single parents may view life insurance as a luxury they can’t afford. However, it could be the primary source of income for your children should you die early. That’s why it’s generally recommended to have a policy that can support the children.
How much coverage should you consider for life insurance after divorce?
Does your salary offer enough to support your children? If so, use that amount in the following calculation to determine how much coverage you should have. Multiply your yearly salary by the years left before each child becomes a legal adult. You may want to plan for your child up to the age of 18, or you may decide to plan until they’re 21.
Let’s look at an example of how to estimate an appropriate policy amount, with a salary of $40,000 and having an 8-year-old child. An 8-year-old would have 10 years until they legally become an adult (age 18). Now, multiply your annual salary ($40,000) by the years remaining (10). You’ll want to consider a policy that pays at least $400,000. If you have more than one child, perform the calculation for each. Then, add the totals to get the recommended amount of life insurance you should carry.
If you can’t make monthly payments on as large a policy as you need, you can choose a policy that you can afford today. As your salary hopefully increases with time, you can add more coverage to your policy.
Divorced couples could benefit from life insurance
It’s often best when ex-spouses carry life insurance, as their children could get financial help regardless of which parent passes first. It can also be helpful if the ex-spouses experience financial trouble. If they’re struggling to pay bills such as insurance and child support, the insurance company could cancel the policy for nonpayment. That could leave the other spouse without protection for alimony and child support.
If only one parent has life insurance, it should be the primary money earner. But both parents should try to have insurance policies large enough to support the children until they’re adults.
