Life insurance advice for divorcees

During a divorce, you need to assess your marital assets and get 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. Term life insurance won’t be treated like a financial asset during divorce proceedings, but the cash value of a permanent policy could. During the process, you’ll need to review the beneficiaries assigned to any existing policies and potentially buy a new policy after the settlement is finalized — by court order or otherwise.

Is life insurance a marital asset?

An asset is an investment component that can generate some monetary benefit, such as stocks, bonds, mutual funds, or retirement accounts. 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 a financial asset, which is based on a contractual right or ownership.

If you have a term life policy, you won’t have to worry about splitting the policy as an asset during the divorce. Term policies have no cash value and simply pay out a tax-free death benefit upon your passing, so they have no financial value while you’re alive.

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, it might be a good idea to ensure your financial security by asking that your ex buy or maintain a life insurance policy as part of your divorce agreement.

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, as long as they are willing to take a 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 whether this is right for your financial needs.

Changing the beneficiary of your 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 your respective life insurance policies, such as who receives your policy’s death benefit, you’ll need to do that through the life insurance company.

The process for changing the beneficiary of your policy varies for each insurer and is dependent on what type of beneficiary you assigned to your life insurance policy.

Here’s how some of Policygenius’ insurance partners process changes to the beneficiary on your policy:

There is one circumstance in which 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 unless you receive ownership of the insurance policy and benefits as a part of your divorce settlement. Otherwise, your former spouse can make any adjustments to the policy without your permission.

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, you can update the beneficiary on your policy to remove them. If you owe alimony or child support, however, a judge may order you to keep your ex as your beneficiary to ensure financial support continues when you’re gone.

Can you name your child as a beneficiary?

After your divorce, you may want to switch your beneficiary from your ex-spouse to your children. Though this may seem like your best bet in securing their financial protection, it is not always the best idea.

Life insurers cannot legally pay 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 - 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.

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 in your divorce settlement. 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 your 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, unless you’re healthy enough to qualify for an accelerated underwriting policy. 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 should begin the life insurance application process at least 6 months in advance to account for any hiccups. You may not have that much 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

The particulars of your court-ordered life insurance policy should be coordinated with your former spouse and respective 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 name them as an irrevocable beneficiary.

3. Get proof for court

If you’re asked to provide proof of the policy for court, your broker or the life insurance company can 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 your divorce, you may need to purchase a life insurance policy for the first time. 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 when you die. Policygenius’ advisers recommend purchasing a life insurance policy that is at least 10-15 times your income, but your coverage should account for your individual circumstances and financial situation.

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

• Childcare - The cost of raising a child up to age 18 can end up being about $250,000. Adequate life insurance coverage ensures that your child is not at financial risk if you pass away and can be put toward their daily needs or anticipated college costs.

• Dependents - Dependent care can cost hundreds of thousands of dollars. If you are responsible for an aging parent or family member, factor that continued care into your plans.

• Income replacement - 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 go toward food, medical expenses, or at-home care.

• End-of-life expenses - Funeral services can cost upwards of $10,000. Leaving behind funds for your family to pay for your final expenses means they won’t have to withdraw from their savings or go into debt to cover those 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 need 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.

Here are the key differences between a term life insurance policy and a permanent life insurance policy.

Methodology: Based on policies offered by Policygenius in 2020.

A Policygenius advisor can work with you to find the type and amount of coverage that suits you best.

Finalizing a divorce can be complex and lengthy, but life insurance should be a serious consideration in the process. Knowing whether your policy is a marital asset, who the beneficiaries are, and whether owning a policy should be part of your agreement will ensure your loved ones have financial support when you’re gone.