Divorce brings about considerable changes to your and your family’s life. Whether you go through an amicable divorce or a disputed one, you have an endless list of things to consider, including custody of the kids, child support, and the dividing of assets.
One thing that is critical but often overlooked during a divorce is life insurance—either sorting out an existing policy or buying one to ensure that you protect the interest of your beneficiaries. In either case, you need to come up with a solution on what to do which your life insurance policy. The important things that you need to take into account for your policy involve making necessary changes to your beneficiary, determining the cash value if you have universal or whole-life policies, and protecting the child support and/or alimony income stream.
Life insurance and separations
If you bought life insurance together as a married couple to ensure your financial responsibilities, it is natural that you appointed each other as the primary beneficiary. However, when you decide to separate, the change in beneficiary designations or insurance coverage doesn’t happen automatically. You need to contact your insurance advisor or the life insurance company and request the beneficiary update form. Once completed and submitted, you can change the beneficiary of your policy.
When is life insurance a financial asset?
Several things make up the list of financial assets that you must divide during a divorce. These include your home, joint savings, emergency fund, and other investments agreed upon in the divorce settlement.
Term life insurance doesn’t fall into the financial or marital asset category, but the cash value of permanent life insurance will.
Dividing your life insurance
The type of life insurance you hold will dictate the best way to separate it. The easiest type to divide is when you are each the holder of an individual term life policy. These policies allow you to continue the coverage independently after divorce.
Splitting term life policies
If you hold a joint first-to-die life insurance policy, you have two choices: decide which of the two will get the coverage or request a split of the coverage from your insurer to create two separate policies. Most insurers allow policy splits in marriage and common-law separations.
Some additional requirements will apply for splitting joint coverage, including minimum coverage amounts and adjusted premiums, taking the current age of both parties into account.
Furthermore, for transferring the policy to one partner, the insurance company requires the correct document completed by your divorce lawyer.
Splitting permanent life policies
When you split a permanent life policy, its associated cash surrender value is usually considered a taxable event. The only time it doesn’t is when the policy gets broken for a divorce or common-law relationship settlement.
Another alternative is for one of the partners to consider giving up their share for cash remuneration. In this way, the other person avoids buying a replacement policy that can prove very expensive if quite a few years have lapsed from purchasing the original one. Whoever gets the policy pays the premiums.
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Changes you can make to your beneficiaries
As discussed earlier, a divorce does not mean that your ex-partner’s name automatically falls away as the beneficiary of your death benefit. Instead, you make this change through your insurer with a legal document.
Before making any changes, you must consider your revocable and irrevocable beneficiaries. If your beneficiary is designated as revocable, then the process is simply completed by filling out the change in beneficiary form.
However, with an irrevocable beneficiary, you need your ex-partner’s consent to make the change. Moreover, suppose you have children with your ex-partner, and they remain the primary caregiver. In that case, leaving them as the primary beneficiary is the best to help provide your children with financial security if you aren’t around.
If you have a child older than 18, you could also designate them as the beneficiary, but in cases where children are too young, remember to appoint a trustee.
How much life insurance coverage Do you need?
The amount of coverage you need depends on what you are protecting. Typically, individuals purchase life insurance to protect their loved ones in case they die. In this case, the important loved ones are your children. You need to determine the financial resources they need to grow to 18 years old when they can start to take care of themselves. Items to consider are: secondary & post-secondary education, college/university, living expenses, and additional expenses in case of your child has a disability. You can use our virtual advisor engine: GetCovered to take you through the steps and provide you with recommendations on the amount and type of policy you need.
Life insurance after a divorce
After a divorce, you must reassess your insurance needs, especially if you have children and liabilities. Often, a divorce settlement will require mandatory life insurance coverage, but even if it doesn’t, consider your responsibilities toward providing your children with an education and maintaining their usual lifestyle in case of your death.
The type of insurance policy you need after a divorce depends on your financial situation. Term life insurance allows you to maximize your coverage within a tighter budget because it’s less expensive than permanent life insurance. Consider the time frame for which you will still have liabilities and family commitments and decide on the term that suits you.
Then again, with a permanent life insurance policy, you could provide your children with a death benefit anytime.
Final take
Divorce settlements require many considerations, but people often overlook life insurance. Make sure to carefully consider whether you need to change the name of your beneficiary after the separation. Additionally, your divorce settlement may require mandatory life cover for any shared expenses.
Make sure that when you each go your own way, you assess your life insurance needs, ensuring that your children remain provided for, no matter what.
Download GetCovered to learn how much insurance you need and compare insurance providers. Once ready, you can select your desired coverage and start your application.
