Life insurance advice for divorcees

Going through a divorce can be complicated enough — how to manage a life insurance policy during a divorce doesn’t have to be. Read on for everything you need to know about life insurance during a divorce.

Nupur Gambhir

Nupur Gambhir

Published January 15, 2020

KEY TAKEAWAYS

  • While term life insurance isn’t technically considered a marital asset, some permanent policies have a cash-value component that can be considered a financial asset during divorce proceedings

  • A divorce does not automatically invalidate or adjust your life insurance policy; you will need to make written changes to your policy regarding your spouse through your life insurance carrier

  • If you are going to receive financial support from your former spouse after the divorce, you can ensure your future financial security by asking for life insurance in the divorce proceedings

  • Likewise, if you are providing financial support to your former spouse after the divorce, you may be asked to purchase a court-ordered life insurance policy

During a divorce, you’re likely assessing your marital assets and getting your finances in order; if you have kids or a mortgage, life insurance is probably one of your many financial considerations.

Each divorce, and every divorced person’s life insurance needs, will be different. Read on to learn about how you can protect yourself financially depending on your individual circumstances.

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How does life insurance work?

Life insurance is meant to protect your loved ones financially in the event that you pass away and are no longer around to support them. Life insurance policies have a few major components that are important to know about:

  • The policyholder - Controls the policy, pays the policy premiums, and has the authority to make any necessary changes
  • The insured - The individual covered by the policy. Usually, the same individual as the policyholder, though the policyholder and the insured can be different people
  • The policy beneficiary - The death benefit recipient if the insured dies
  • Death benefit - The money paid out to the beneficiary if the insured dies

The type of policy you have can determine if life insurance becomes a part of divorce proceedings. There are two types of life insurance policies that people usually choose from:

  • Term life insurance, which lasts for a set term but has no cash value.
  • Permanent life insurance, which lasts your entire life and has a cash value.

Is life insurance a marital asset?

An asset is an investment component that can generate some monetary benefit. A life insurance policy’s cash value is a financial asset, which is based on a contractual right or ownership. Common financial assets are:

  • Cash and cash equivalents, like a permanent life policy’s cash value
  • Bonds
  • Stocks
  • Certificates of deposit
  • Mutual funds, also known as money market funds
  • Retirement accounts, like 401(k)s and IRAs

While your life insurance policy itself is not an asset, permanent policies that come with a supplemental component called the cash value can be considered an asset.

If you have a term life policy, you won’t have to worry about splitting the policy up as an asset during the divorce. Term policies are your standard life insurance policies; they do not come with any supplemental components and have no cash value. They offer bare-bones life insurance coverage, unlike permanent policies, which can be sometimes seen as an investment vehicle due to their tax-deferred savings component.

Changing the beneficiary of a life insurance policy

Getting a divorce does not automatically invalidate or change your life insurance policy. If you or your former spouse want to make any adjustments to a life insurance policy, such as who receives your policy’s death benefit, you’ll need to do that through the life insurance carrier.

The process for making adjustments to the beneficiary varies for each carrier and are dependent on what type of beneficiary you assigned to your life insurance policy.

Here’s how the top life insurance carriers allow for changes to the beneficiary on your policy:

CARRIERBENEFICIARY CHANGE POLICY
AIGCan be changed online
Lincoln FinancialChange can only be made by faxing, emailing, or mailing beneficiary change request form
PrudentialCan be changed online
Banner LifeCan be changed online
Pacific LifeChange can only be made by faxing, emailing, or mailing beneficiary change request form
Mutual of OmahaChange can only be made by mailing beneficiary change request form
ProtectiveCan be changed online
SBLICan be changed online
TransamericaChange can only be made by mailing beneficiary change request form

There is one circumstance where you might not be able to change the beneficiary on your life insurance policy without their consent — when you have listed your beneficiary as an irrevocable beneficiary.

An irrevocable beneficiary is a beneficiary who cannot be removed from your life insurance policy without their approval. To remove or change a beneficiary from your life insurance policy without their consent, they need to be assigned as a revocable beneficiary on the life insurance policy.

Can you stay on an ex-spouse’s life insurance policy?

If your ex-spouse took out a life insurance policy that insures you and pays out a death benefit to them in the event of your death, they can keep that policy even after your divorce. This is because only the policyholder can cancel or change a life insurance policy.

While you can ask your ex-spouse to change the beneficiary, it is entirely up to them to actually do this.

If your ex-spouse took out a policy that insures themself and listed you as the beneficiary, they can make adjustments to the policy and who receives the death benefit without your permission. An exception to this rule is if you receive the insurance policy and benefits as a part of the divorce agreement.

Can you remove your ex-spouse as the beneficiary of your life insurance policy?

If you own a life insurance policy that insures you and names your ex-spouse as the beneficiary, your ex-spouse will still be your beneficiary even after your divorce — unless you change your beneficiary. However, a judge could order that you keep your ex as your beneficiary if you owe them alimony or child support. Otherwise, you are free to change the beneficiary.

Naming your child as the beneficiary

After a divorce, you may decide to switch the beneficiary from your ex-spouse to your children to ensure that they are provided for in the event of your death. Though this may seem like your best bet in securing their financial protection, it is not always the best idea.

This is because life insurance carriers are prohibited from paying out the death benefit to anyone who has not reached “the age of the majority,” which is 18 in most states and 19 in Alabama and Nebraska. If you die and your beneficiary is under the age of the majority, courts can appoint a legal guardian to decide what to do with the funds, which can tie up the death benefit in court proceedings for years.

There are three ways to make sure that your children receive the death benefit in the manner (and time frame) that you would prefer:

  • 1. Arrange for a custodian to control the funds - This should be someone you trust to act in the best interest of your children. You will need to specify in the policy if this is someone other than the surviving parent.
  • 2. Set up a trust - A trust is a legal entity that designates how your assets go to your heirs. A trust can designate specific assets, beneficiaries, and a trustee to manage the trust.
  • 3. Keep your ex-spouse as the beneficiary on your life insurance policy - If you and your ex-spouse are sharing custody and financial responsibility of your children, you might consider keeping them as the beneficiary of your life insurance policy.

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Should you ask for life insurance in a divorce?

Even after a divorce, there is a chance of remaining financially linked to your former spouse. If you will rely on your ex-spouse for any form of financial support in the future, then it might be a good idea to ensure your financial security by asking for the life insurance policy during your divorce.

There are three main reasons to ask for life insurance in a divorce:

  • To protect alimony payments that you will receive
  • To protect child support payments that you will receive
  • To protect pension or retirement funds that you will receive

If you want to manage the policy, you can own the policy and list your former spouse as the insured on the policy, as long as they are willing to take the medical exam. Doing so means you won’t have to worry about any missed premium payments or a policy lapse because you’ll be the one paying for the policy.

Each divorce proceeding is different, and final divorce rulings invariably differ as well. While ultimately, the decision is up to the judge, you can talk to your lawyer about what your financial needs will be.

Court-ordered life insurance

Alongside alimony payments, child support, or any other financial support, a judge may decree life insurance as a part of the spousal support during divorce proceedings. This is called court-ordered life insurance and you usually have a deadline by which you need to secure a policy.

If the court orders you to buy life insurance as a part of divorce proceedings, there are three things to keep in mind:

1. Get started ASAP

The life insurance application process can take 4-6 weeks to complete. It could take even longer if the life insurance company needs supplemental information or your initial application is rejected and you need to shop around for a policy.

Ideally, you would begin the life insurance application process at least 6 months in advance to account for any hiccups. You may not have that type of time, but it is important to get started as early as possible to make sure you have a policy in place by the court's deadline.

2. Communicate about the policy from the start

How you set up your life insurance policy should be coordinated with your former spouse and lawyers. Who will own it? How long should the term be and how much coverage should it have? Who will pay the premiums?

There are two ways to set up the policy to ensure that your ex receives the benefit: either they can be the owner of the policy and the beneficiary, or you can be the owner of the policy and you can name them as an irrevocable beneficiary.

3. Get proof for court

If you’re asked to provide proof for court, the broker or life insurance company should be able to give you a copy of your signed application. If you opted for temporary coverage when you applied, a receipt of payment should also work.

Again, divorce proceedings vary for each case. You’ll want to work with your lawyer while going through this process to make sure you are following the court’s guidelines.

Buying life insurance after a divorce

After a divorce, you may need to purchase a life insurance policy for the first time or a new policy entirely. There are a couple of steps you can take to ensure that you buy the right life insurance policy and coverage.

Determine how much life insurance coverage you need

If you’re purchasing life insurance after a divorce, you want to make sure that you are purchasing enough coverage to protect the loved ones you would leave behind if you die. It’s generally recommended to purchase a life insurance policy that is 10-15 times your income, although it depends on your individual circumstances and financial situation.

The following factors determine how much life insurance coverage you need:

  • Expenses - The cost of raising a child can end up being about $1,000,000. Adequate life insurance coverage ensures that your child is not at financial risk if you pass away.
  • Dependents - Dependent care that you may no longer be around to provide can end up costing hundreds of thousands of dollars. If you are responsible for a child or an aging parent, you will want to ensure that they have access to support if you can no longer take care of them.
  • College expenses - A life insurance payout doesn’t need to be used immediately — it can be saved for the future. If you forecast any future college expenses, the death benefit can be put into a 529 plan and saved for future college costs.
  • Financial cushion - Whether you bring in an income or take care of services around the home, your economic contributions will need to be accounted for if you die. A financial cushion for your loved ones can account for things such as food, medical expenses, or at-home care.
  • End-of-life expenses - Funeral services can cost upwards of $10,000. Leaving behind a financial cushion for your family to pay for your end of life expenses means they won’t have to withdraw from their savings or go in debt to cover your end of life costs.

Check out the Policygenius calculator to get a better picture of how much life insurance you might need.

Determine what type of life insurance policy you need

Aside from the amount of life insurance coverage you purchase, your individual circumstance dictates what type of life insurance policy you will buy.

Term life policies tend to be the best option for most people, but individuals with specific circumstances, such as a child with special needs or a high net-worth, may be better accommodated by a permanent life insurance policy. If you just want to ensure that your children are financially secure through college or that your mortgage gets paid off, you should purchase a term life policy.

The graph below shows the key differences between a term life insurance policy and a permanent life insurance policy.

FEATURESTERM LIFE INSURANCEPERMANENT LIFE INSURANCE
Duration1 - 30 yearsLife
Cost$25-35/month6-10x more than term
Guaranteed Death Benefit?YesYes
Guaranteed Cash Value?NoYes
How Cash Value GrowsN/AEarns interest at a predetermined fixed rate
PremiumsCan increase periodically or stay level for the policy durationLevel
NotesNo risk of losing coverage, but no cash value when the term endsNo risk compared to other permanent types, but you may find better investment options elsewhere

A Policygenius advisor can work with you and your specific circumstances to determine how much coverage you need and what type of life insurance policy you should purchase.