If you're going through a divorce, life insurance may be low on your list of priorities, but any policies you purchased during your marriage could be considered marital property and may be subject to distribution. That said, the reason to sort out your life insurance with your former spouse is less to protect your financial interests than those of your children — if you have any.
Divorce proceedings typically differ from state to state. Still, insurance will likely come up during a divorce settlement negotiation, especially if there are children involved and the primary parent earns significantly more than the non-primary parent, says Andrea Javor, certified divorce coach at Happily Better After. “Almost anything can be negotiable in a divorce case, and life insurance may be no different,” she explains.
Here’s a quick guide to what to expect if you’re divorcing and one or both of the partners has insurance.
Term life insurance simplifies the split
Whether or not you'll have the option of splitting your life insurance with your ex will mainly depend on the type of policy you have: term or permanent.
As the name implies, term life insurance covers a temporary financial need with a death benefit that expires between 10 to 30 years. If you, the insured, died within that timespan, your beneficiaries would receive a payout for the face value of the policy.
Commonly, policyholders tend to choose a term that expires right around the time their significant expenses are over — after the kids have moved out or their mortgage is paid off. As for the death benefit, the golden rule of thumb is to purchase 10 to 15 times your annual income, although that will depend on your financial needs.
Since term life insurance is a simple product that holds no cash value while you’re alive, this type of policy would not be treated as a marital asset during divorce proceedings, says Nick Davidson, a financial advisor at Foster Klima. If you bought a term life policy while you were with your ex, the policy would likely be considered separate property because the financial asset in the term policy is the death benefit.
Whole life insurance can complicate matters
Conversely, permanent policies such as whole, indexed, variable, and universal life insurance do not expire as long as the policyholder pays the premiums. And these policies have an investment component known as "cash value" that could be considered a marital asset and may need to be split, says Luis Strohmeier, partner and certified divorce financial analyst at Octavia Wealth Advisors.
“Since the life insurance policy itself cannot be split in two, both parties can negotiate the value of that cash component in exchange for another asset,” says Strohmeier. This means that if you wanted to split your shared permanent policy, you’d have to cash it out and divide the proceeds or use the cash payout to cover legal fees or joint debts. And this is typically the most viable course of action for many, as permanent policies are expensive to maintain.
Naturally, many divorcées have a change in their monthly cash flow after splitting. Taking the expensive monthly premium of a whole life policy out of the picture can help alleviate costs, says Mitch Gordon, family law attorney at Bradford & Gordon. Nevertheless, he suggests that once the permanent policy is cashed out, each party should consider getting a term life policy to cover their financial obligation to the other spouse and the kids.
Life insurance for the sake of the kids
If there are children involved, you may still have a financial obligation to your ex after the divorce settlement — or they to you. In these instances, there may be the need to maintain an existing life insurance policy or take out a new one, in the ex-spouse's name, to protect alimony payments, child support, and pension or retirement funds.
A new policy may be needed if your spouse is in danger of not being able to cover their obligations to the kids were he or she to die. Ideally, the spouse themselves recognizes this vulnerability and is willing and able to take out (and pay for) the policy, or at least agrees to do so as part of a divorce settlement.
If that isn’t the case, though, you may want to consider taking out a policy on your ex, to benefit you and your kids. Even if you plan to pay the premiums, however, you will need your ex’s co-operation to buy the policy. Its approval will require their agreement to share personal medical information and perhaps to undergo a medical exam.
The process is potentially simpler with an existing policy, especially if you’re prepared to pay the premiums. Keeping a policy on your ex-spouse especially makes sense if they have developed potentially life-threatening medical issues since the policy was taken out.
It may also be wise if he or she is in a risky line of work, such as firefighting, policing, or construction. In that case, you could keep a term life policy on them as a precautionary measure. “If your ex runs into burning buildings or operates dangerous equipment for a living,” Gordon says, paying “an $80 a month term life insurance policy on them is a smart idea.”
Expect life insurance to be part of divorce negotiations
Strohmeier adds that the decision on whether or not to keep a life insurance policy on an ex will be part of the settlement agreement negotiation. If the ex that is paying for the policy is comfortable with maintaining it, the policy can remain. If the ex has no interest in providing coverage, it will be impossible to keep the policy, as it has to be a mutual agreement.
Once you get a divorce, you should aim to gain ownership of any policies your former spouse took out on your life because only they can modify the beneficiary designation on the policies. Even if you’re the policyholder, the judge could allow your former spouse to remain as a beneficiary if you owe them child support or alimony, explains Ben Reynolds, CEO of Sure Dividends.
“While you can name your children as beneficiaries, it can be complicated if they are minors. Therefore, you could establish a trust with a managing trustee that can help legally divide your death benefit between your children,” Reynolds says. This can be a good option when you don’t want or can’t trust your ex-spouse with the responsibility.
Choosing between term life and another policy type
Legal wrangling aside, if you and your ex need to purchase a new policy after your divorce, you’ll need to determine if term or permanent life insurance is the best choice. Term life will cover you for a predetermined period and is a popular option for most people looking for standard coverage, but higher net-worth individuals or people with special needs children could benefit from a permanent policy.
Finally, Javor believes that one of the most important things you can do to stabilize your financial future when getting divorced is to plan for the long term. “After divorce, before you make any big moves, meet with a financial planner to understand the role life insurance plays in your larger financial picture." This should be a central part of your financial plan, she says, especially if you have kids.