Negotiating Life Insurance During a Divorce

Last updated on April 26, 2019 by Mark Cussen in Life Settlements, Retirement Planning

Divorced dad coming home to kids after discussing life insurance.

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Changing life insurance policies when you get divorced is often overlooked. Here’s what you need to know about your policy if this happens.

Divorce is usually a very messy process. The custody of children and the division of assets may be contested in court for months before an agreement is finally reached. Then there is the issue of child support and alimony. The major breadwinner in the family may be left with these obligations, but what happens if something were to happen to him or her?

It is important to make sure that any life insurance coverage that the breadwinner had before the divorce stays intact, or at least is changed in the proper way that it needs to. And this issue frequently gets buried at the bottom of a pile of other issues and isn’t addressed properly until it is perhaps too late.


Changing Beneficiaries

If you carried life insurance on yourself while you were married, then you most likely listed your spouse as the primary beneficiary, with your kids being secondary beneficiaries. But now you may want to make your kids the primary beneficiaries on the policy if you don’t want your ex-spouse to receive any of the death benefit.

This can be especially true if your spouse is financially irresponsible or unreliable.

You may need to draw up a revocable living trust and name that as the policy’s beneficiary if your kids are under 18 in order to ensure that the policy proceeds are used in the manner that you desire.

You may also need to make changes to your will or other estate planning documents in order to ensure that your assets will now be dispersed according to your wishes after the divorce.


Alimony and Child Support

If you are tasked with making alimony and/or child support payments, then you may need to restructure your policy to equal those amounts for the remaining time that your kids would need protection.

For example, if you have a six year old and your child support payments will be $1,500 a month, then you would need a policy to pay a death benefit of at least $216,000 ($1,500 x 12 months x 12 years (18-6)). Or, you may need your death benefit to equal the amount of your earnings per year. If you make $60,000 per year and have a six year old, then you would need your death benefit to be at least $720,000 ($60,000 x 12 years).

If you are going to receive alimony and/or child support and your ex-spouse was the primary breadwinner, then you may want to consider taking out a policy on him or her with yourself as the policy owner in order to ensure that your court-ordered payments are protected in case something happens.

You can purchase a new policy if there was no coverage previously, or use a current policy if you or your spouse took one out while you were married. It may not seem fair to have to make the premium payments yourself, but it may be necessary if you won’t be able to count on your ex making regular premium payments.

Missed payments can cause the policy to lapse, and the insurance company could then terminate the policy, leaving you and your kids with no financial protection. You may need to increase the amount of protection that the policy provides, which is possible with a universal life policy or variable universal life policy. If you have a whole life policy, then you can use the dividends that it pays to purchase additional amounts of paid-up whole life coverage until you have the death benefit that you need.


Rights of Ownership

If you are going to either purchase a new life insurance policy or use an existing one, you need to be certain that you are the sole owner of the policy. If your spouse is the owner or co-owner of the policy, then you’ll need to petition the court to change ownership of the policy to you.

If you don’t do this, then your ex-spouse could change the life insurance beneficiaries on the policy to whomever they so choose, leaving you and perhaps your kids unprotected. Your attorney or financial advisor can help you to change the ownership over to your name, and there will be extra paperwork and more forms for you to fill out in order to do this. But this will give you the power to make your own beneficiary designations.

Two rings and money after life insurance and a divorce.


Dividing the Cash Value

If you and your ex-spouse jointly owned a permanent life insurance policy that has accumulated a material amount of cash value, then this amount may be split between you based upon the terms of your divorce papers.

Whole life policies, universal and universal variable policies all build cash value, but term insurance does not. (However, term life insurance is a much cheaper form of coverage than permanent life insurance, and it may be ideal for income protection for a specific length of time, such as covering earnings or child support until your kids reach the age of majority. You would be wise to shop around for a competitive life insurance quote on a term life insurance policy for this.)

If your policy does have cash value, then you may be able to transfer ownership of the policy into your name only if you are willing to let your spouse take out some or all of the cash value.

The policy’s death benefit will be reduced by the amount of cash value that is withdrawn or any loans that were taken out on the policy, but it will be in your name and will remain in force as long as you continue to pay the premiums. Just be sure to list the policy’s cash value on your balance sheet so that you can get your fair share of this in the divorce decree.

If you or your spouse has a term life policy that will last for the required period of time, then you can simply keep the policy in force or change its ownership to you in order to ensure that you’re adequately protected.

Judges routinely order those who owe child or spousal support to carry enough life insurance to pay off all of their debts and other financial obligations if they die prematurely. The courts in the majority of states in the U.S. have the power to invoke this type of order, so be sure to request this in the divorce process if you are the recipient of court-ordered payments.


Self-Insuring

If you are going to be the primary caregiver for your dependent children and you weren’t lucky enough to receive any child support or alimony in the divorce settlement, then you should strongly consider purchasing a policy on yourself to protect your kids if something should happen to you.

You will need to name your kids as the beneficiaries and also name a reliable executor to act on their behalf after you’re gone.

And if you or your kids are still named as beneficiaries on your ex-spouse’s life insurance policy, you should check it at least once a year to make sure that it is still in force with the full amount of death benefit that was ordered in the divorce decree.

If the death benefit is now less than it was before, or if your ex let the policy lapse, then you’ll need to take him or her back to court and ask a judge to enforce the order in the decree.


The Life Settlement Solution

If you get divorced and have no children or other dependents, then you may not need the coverage anymore and, you and your ex may be better off simply selling the policy to a qualified buyer.

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This is usually much more profitable than merely splitting the amount of cash value in the policy (assuming you have permanent coverage), as the buyer will usually pay you two to three times the amount of the cash value and then assume ownership of the policy.

The company will receive the death benefit when you or your spouse (or both of you) dies, and they will assume the responsibility of paying the premiums from then on.


Conclusion

Although it may not be high on your list of priorities, life insurance can be a valuable asset to keep if you are getting divorced. Make sure that the ownership and beneficiaries on the policy are correct in order to protect yourself and your dependents. Consult your financial advisor or life insurance agent for more information on how life insurance can impact your divorce proceedings.

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Mark Cussen
Mark Cussen
Mark Cussen is a financial counselor with more than 13 years of experience and has professional designations as a CFP®, CMFC and AFC. Mark has worked in all segments of the financial industry from investment management to mortgage loan origination, life insurance and annuities, financial planning and income tax preparation. He currently works with the U.S. military, helping service members transition financially into civilian life and in other capacities. Mark also sells life insurance and annuities on the side. He graduated from the University of Kansas with a Bachelor’s degree in English.

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