Life Insurance and Divorce: Untangling Shared Policies
In a divorce, life insurance has a high importance. Sorting out life insurance is one of the unpleasant duties that accompany a divorce. Furthermore, there is a growing trend in courts and legislatures mandating that divorcing parties get or retain life insurance to protect their children and former spouses. This procedure includes adjusting beneficiaries as needed, accounting for whole or universal life insurance's cash value, safeguarding income and child support payments, and—above all—making sure that the children involved stay financially secure.
Thus, if you go through a divorce you should make well-informed decisions before cashing out or canceling your life insurance policy. Here is what you need to know.
Understanding The Main Types of Life Insurance Beneficiaries
A primary beneficiary and a contingent beneficiary are the two types of life insurance beneficiaries.
The individual who will get all death benefits from a life insurance policy when the insured passes away is known as the primary beneficiary. You may designate more than one primary beneficiary, each of whom will get a portion of your death payments. Should the primary beneficiary pass away before retirement benefits are paid out, a contingent beneficiary will get the insured's death benefits. Furthermore, if the primary beneficiary is unable to be found, the contingent beneficiary will receive the payout.
Beneficiaries of life insurance can be either revocable or irrevocable.
A revocable beneficiary is a person you name to get your death benefit upon your passing, but you have the ability to remove them from your beneficiary list at any point, for any reason. A person or organization designated as a recipient of your life insurance policy death benefit who cannot be readily altered or withdrawn without their approval is known as an irrevocable beneficiary. This means that you and the irrevocable beneficiary must both approve any changes to your policy about their being a beneficiary. If both parties don’t sign the necessary documents, the irrevocable beneficiary is still eligible to receive benefits from your life insurance policy.
The beneficiaries of your life insurance can be several individuals. In the event that you designate more than one beneficiary, you will need to determine the share of the death benefit that each recipient will be entitled to.
Life Insurance Beneficiary Rules After Divorce
Selecting the beneficiaries of a life insurance policy is one of the most crucial choices an owner makes. Beneficiary designations must be carefully planned and then periodically reviewed. Keep in mind that every life insurance provider sets its own guidelines regarding beneficiary choices that it will accept.
Generally, the policy owner has the ability to modify or cancel beneficiary designations at any point while the policy is still in effect. Divorce is among these instances.
Different insurance providers have different policies regarding divorce and life insurance. For this reason, it is essential that you let the insurance provider know in advance about your plans.
To ensure your dependents are financially secure after a divorce, you may want to consider either buying a new life insurance policy or changing the beneficiary designations on your current policy. The type of policy you purchased will determine how to resolve this issue. Your divorce process might involve an evaluation of your current life insurance policies as a financial consideration. A term life insurance policy is not considered as a financial asset. A permanent life insurance policy's cash value, however, can be regarded as a joint financial asset.
Your divorce decree may oblige you to keep your ex as a beneficiary, if you are required to pay alimony or child care to your ex. Alternatively, you might have to get new insurance that, in the event of your death, would give your ex a specific sum of money.
No matter what type of life insurance you have, you should speak with your divorce attorney as soon as possible to learn about the specific requirements governing your life insurance beneficiary following a divorce. They can offer you advice on how the terms of your particular divorce settlement should include life insurance. Note that different states have different laws regulating these procedures, some of which are more favorable to the policyholder than others.
- The primary beneficiary named by the majority of married couples with life insurance is their spouse. After a divorce, though, you might not want your ex-spouse to get anything upon your passing. You may want to leave your death benefit to your child after your divorce. However, in most states, children have to wait until they are 18 to be able to lawfully accept a life insurance death benefit. Therefore, you should identify the person who would be your child's primary caregiver in the event of your death, and name him/her as your life insurance primary beneficiary. But, if you decide to name your child(ren) the beneficiary of your life insurance policy, be sure to create a trust because they might not be old enough to legally retrieve the money.
Consider the three options below to make sure your children receive the death benefit after your passing:
- Designate a custodian
- Create a life insurance trust
- Retain your former spouse as the primary beneficiary
It is important to note that the court can require you to keep your ex-spouse as the beneficiary of your life insurance policy if you owe alimony or child support.
What Type of Life Insurance to Buy After a Divorce
Your post-separation financial situation will determine the kind of insurance you should get. If you want to maximize your coverage while staying within your budget after a divorce, term life insurance is the best option. Compared to many other options for life insurance, a term life policy is less expensive. A permanent life insurance policy, on the other hand, would cover you for the rest of your life. This kind of coverage costs more than a term life policy, but it may provide your children a death benefit at any time after your passing.