Even though you’re getting divorced, you may still rely on your former spouse for financial support — alimony, child support, and mortgage payments are just some of the financial obligations ex-spouses may negotiate in the divorce settlement. But what happens if your ex-spouse dies prematurely? In many ways, it’s just as devastating (financially, at least) as if they died while you were still married.
That’s why it’s crucial that you ask for a life insurance policy in the divorce settlement. While it may seem callous or strange (or like a red flag to any future detective investigating a murder scene), it actually makes total financial sense and is a common part of many divorce proceedings.
What life insurance covers in a divorce
Life insurance is, primarily, a risk management tool. Let’s look at a real life example. Mike is paying Cheryl $1,000 in child support for their eight-year-old son, Ricky. This ads up to $12,000 each year for the next ten years, for a total of $120,000 to be paid out by Mike. But there’s a chance that Mike may die before that ten years is up, leaving Ricky without some of the money that he’s owed.
In this situation, it makes sense for Cheryl to be the beneficiary of a life insurance policy taken out on Mike for about $120,000. This life insurance policy isn’t about making Cheryl and Ricky rich — it’s solely designed to cover what she is legally owed by the terms of her divorce.
Life insurance doesn’t just have to cover child support — in fact, it should cover all of your ex’s financial obligations to you.
Who should own the life insurance policy
Let’s be frank — you shouldn’t trust your ex to maintain this life insurance policy. A single missed payment can cause the policy to lapse, leaving you with no financial safety net.
Most life insurance companies allow you to take a policy out on someone else, as long as you can prove "insurable interest" (basically, prove that their death would cause a financial burden on you), which should be easy once you show them the divorce papers. You’ll still need your ex’s cooperation, specifically when it comes to the insurance medical exam, but otherwise, you’re in total control of the policy.
This does mean, of course, that you’re in charge of paying for the policy. You can (and should) make your ex give you the money to pay for it as part of your divorce settlement. If your ex is late at all with their payment, however, you’re still responsible for paying for the policy out of your own pocket.
It’s also important to note the difference between a term life insurance policy and a permanent (or whole) life insurance policy. A term life insurance policy is what we’ve been describing above — someone dies, the beneficiary gets a lump sum. A permanent life insurance policy, on the other hand, builds a cash value, similar to an investment portfolio. You may be obligated to part or all of this cash value — discuss this with your lawyer.
What if they already have a life insurance policy?
If your spouse already has a life insurance policy, it may become part of the divorce settlement. This can get pretty complicated — depending on the state, you may be legally obligated to part of the benefit amount or you may have to specifically fight for it in court. These details are best left to your lawyer, who, trust us, has probably dealt with this before.
You may be able to force your spouse to make you the beneficiary on a previously purchased policy. However, they are still the policyholder and the benefit amount may not cover their entire obligation. Additionally, you should note that your ownership stake in a cash value policy is not the same as receiving a benefit when someone dies, and you should not treat it as life insurance coverage.
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