Life Insurance and Divorce: Protecting Your Family’s Future

If you have found your way to my blog, I'm guessing that your marriage did not go as planned. Let's face it, in life, there are a lot of things that don’t work out as expected. One of the most challenging examples is when you enter into a marriage with the intention of spending the rest of your life with someone, only to end up filing for divorce.

Divorce can have a significant impact, both financially and emotionally, not just on the couple involved but also on their children and other family members. In the midst of immediate financial and legal concerns, it is crucial for couples to consider ways to protect their individual financial futures and those of their children in the event of death. This brings me to the topic of life insurance coverage and divorce, which may offer a viable solution.

While I always bring up the topic of life insurance during the course of mediation, I find that few people are willing to engage in an in-depth conversation about it. Therefore, let's take a closer look at several different scenarios.

After a divorce, if the non-custodial parent who is responsible for paying spousal and/or child support were to pass away, the custodial parent may find it challenging to maintain the children's lifestyle or save for their future college education. On the other hand, if the primary parent were to pass away, the other parent may struggle to afford childcare expenses. Hence, divorcing couples should consider incorporating life insurance policies into their divorce decree.

Life Insurance in Divorce: Options to Consider

There are various options to consider when it comes to life insurance and divorce. The primary parent may choose to purchase a life insurance policy on the other parent, even if it's just a term life insurance policy until the kids turn 18 or finish college. Alternatively, transferring ownership and beneficiary arrangements on an existing policy may be another viable option.

The primary parent may also request spousal or child support increases to cover the cost of policy premiums. If the other parent remains the policy owner, the divorce decree can include provisions to ensure that the custodial parent is named as the irrevocable beneficiary and receives ongoing proof of premium payments and policy continuation.

On the other hand, the non-primary parent may wish to retain existing policies to protect other financial interests. To safeguard children from a previous marriage, the non-custodial parent may consider purchasing a new policy on their life, with the former spouse as the owner and beneficiary. It is essential to initiate these actions before or during the divorce proceedings to avoid gift tax obligations.

Negotiating Existing Life Insurance Policies

Before you start negotiating for existing life insurance policies, it's crucial to gather comprehensive data. This includes information about the policy type, premium amount, and potential cash value. Take the time to evaluate your life insurance requirements carefully. Determine if there is an active policy that can effectively fulfill your specific needs. By doing so, you'll be better equipped to make informed decisions and secure the coverage that suits you best.

When dealing with existing life insurance policies, it is crucial to notify the insurance company of any beneficiary changes. It's worth noting that a will cannot be used for this purpose. Additionally, if the insured individual remarries and the policy designates the "husband" or "wife" as the beneficiary, the new spouse may receive the proceeds.

If the insured does not remarry and the same policy language is in effect, the proceeds may be paid to the secondary beneficiary. If the insured's estate is named as the new beneficiary, the probate process may delay the distribution of insurance proceeds. Moreover, designating minor children as beneficiaries can lead to complications, as insurance companies generally do not pay minors directly. Therefore, creating a trust for minor children and naming the trust as the beneficiary of the policy proceeds could be a prudent step to consider.

Divorce is rarely easy, but with a well-planned strategy, the short- and long-term financial needs of your loved ones can be met. If you require assistance aligning your divorce agreement with your short- and long-term financial goals, I encourage you to schedule a call today. We provide virtual meetings for clients throughout the United States and are also available for in-person consultations in Cleveland, OH. Let us help you take control of your financial future.

Please note that Intentional Divorce Solutions does not offer insurance products. However, we do provide comprehensive financial planning services to help determine if you have the appropriate level of coverage. If you are in need of additional protection, we would be happy to make a referral for you.

Frequently Asked Questions About Life Insurance in Divorce

Q: Why is life insurance important in a divorce? 

A: Life insurance can serve as a form of financial protection for both parties involved in a divorce. It can provide financial security for any children involved and can also ensure that spousal or child support payments will continue to be made in the event of the insured party's death.

Q: Who should be named as the beneficiary on a life insurance policy during a divorce?

A: This decision ultimately depends on the specific circumstances of each couple's situation. In some cases, it may make sense for one spouse to remain as the beneficiary, while in others, it may be more appropriate to name children or trust funds as beneficiaries.

Q: Can I change the beneficiary on my life insurance policy after my divorce is finalized?

A: That depends on what is in your financial divorce settlement. With that said, as long as there is no regal reason not to, you can change the beneficiary on your life insurance policy at any time. However, it is important to note that in some states, there may be laws in place that automatically revoke a former spouse's status as the beneficiary after a divorce is finalized.

Q: What happens if I do not update my life insurance beneficiaries after a divorce?

A: If you do not update your life insurance beneficiaries after a divorce and pass away, your ex-spouse may still receive the death benefit from your policy. This could lead to complications and conflicts with other family members who may have expected to receive those funds. It is important to review and update all legal documents, including life insurance policies, after a major life event, such as a divorce.