how does life insurance work during a divorce

Today, we’ll explore everything you need to know about life insurance policies and divorces. Consider this your unbiased guide to:

Why Do Divorcees Argue About Life Insurance?

Everyone has heard tales of difficult divorces, and maybe you’re experiencing one. But even if your divorce is amicable, both parties might fight about a life insurance policy.

There are two reasons even amicable spouses argue about life insurance during a divorce: the benefits, and the responsibilities.

The Benefits of Life Insurance

Life insurance policies provide us with peace of mind through a feeling of financial security. A whole life insurance policy might have considerable cash value built up. It can also be sold to a life settlement broker or cashed-in for a lump sum So they can be a significant financial asset.

Term life insurance policies don’t build a cash value, but they’re still valuable to the beneficiary.

The Responsibilities

Most life insurance policies require a premium payment monthly, quarterly, or yearly. So, divorcees might bicker about the financial responsibility of premium payments. This is important, because a missed premium payment on a term policy might cause the policy to lapse or be canceled.

When a premium payment is missed on a whole life policy, the insurance company will usually take that payment out of the cash value. More missed payments lead to a diminished cash value. That asset becomes worth a bit less.

If a whole life policy doesn’t have much cash value yet (it takes several years to build up a meaningful amount,) the policy can be canceled when your missed payments are greater than the sum of your cash value. The entire investment plan fails and becomes a loss.

Is a Life Insurance Policy Considered a Marital Asset During a Divorce?

Marital assets are usually jointly held property. A term life insurance contract, on its own, is not an asset in a divorce because you do not have access to death benefit right now.

States have different laws regarding “equitable distribution” or “community property,” in a marriage. If you live in a community property state, the assets associated with a whole life insurance policy (the cash value) might need to be split evenly between both spouses, unless some other arrangement can be made.

Before we present some specific situations, you might encounter during your divorce, let’s remember who’s who on a policy.

Who’s Who on a Life Insurance Policy?

A life insurance policy is a contract, and there are a few key players involved:

  • The insured is the individual whose life is insured.
  • The beneficiary is the person or organization that will collect death benefits when the insured passes away. There can be more than one beneficiary on a policy.
  • The policy owner oversees the policy. The policy owner does not need to be a beneficiary or insured individual but is responsible for making the premium payments. This person can make changes to a policy regarding beneficiary names, and the percentage of death benefits received by multiple beneficiaries.
  • The insurer is the life insurance company.

Now let’s explore some situations that can arise during divorces, and possible solutions.

Life Insurance and Divorce: Possible Situations and Remedies

Life insurance can be complicated, so we’ll use a few scenarios to illustrate common issues.

Example 1: Tom and Trisha Have a Term Policy for $150,000

Tom and Trisha are a young couple in their early 20s, and they have a toddler, Junior. Tom is the owner of a term life policy; he is also the insured. Currently Trisha is the sole beneficiary, and should Tom die, she will receive the entire $150,000 death benefit.

This policy is good for the next 20 years, and Tom pays $20 month for coverage.

Trisha wants Tom to continue paying for the policy, and she wishes to remain the beneficiary. However, Tom doesn’t like this idea at all. They have a few options.

First, Tom can make his son the beneficiary. But since Junior is young, a reasonable adult or attorney needs to be listed on the policy, too. Insurance companies will not hand $150,000 to a minor if Tom dies. So, he can add Trisha to the policy to collect benefits on his son’s behalf. If Tom doesn’t trust Trisha, he can name an attorney on the policy to handle it, or anyone else he trusts, like the child’s grandparents.

But perhaps Tom doesn’t wish to continue paying on a life insurance policy at all. He’s looking at considerable upcoming costs of child support and alimony. In that case, he could make Trisha the policy owner. She would be responsible for paying the premium payments to maintain the policy.

Finally, Tom could use this insurance policy as a negotiation tool for some other part of the divorce. Perhaps he agrees to continue paying $20 a month for the policy, but only on the condition that his alimony payment is reduced by $20.

Ultimately, the decision will usually be made in the mediation portion of the divorce proceedings. That’s when a court-appointed mediator will sit with the couple and finalize these choices. If changes do need to be made to a policy, it’s important that Tom follows the final judgment to the letter.

Example 2: Stan and Sarah Have a Whole Life Policy Worth $20,000 and $1,000 Cash Value

Stan and Sarah are a middle-aged couple with no children. Sarah is both the owner and beneficiary of a whole life policy. Stan is the insured.

Sarah purchased this policy to insure Stan, and she has made the premium payments for five years. She argues in court that the entire policy is hers, and depending on her state, the judge may agree.

In this instance, Stan and Sarah agree to leave the policy as it is. Sarah will continue paying the premium, and she will remain the beneficiary. When the time comes, Sarah will collect the death benefit. Or she can cash in the policy later when she’s ready to retire. She could also sell the policy to a life settlement broker; Stan has no say in the matter.

In some states, Stan might argue that the cash value of the life insurance policy is an asset. If the judge agrees, he may order Sarah to pay Stan his half of the current cash value, or $500. If Sarah can do this and keep the policy, she still ends up making more money later.

Example 3: The Brown Family Has a Bunch of Life Insurance Policies and a Mansion

Now let’s imagine Judy and Thomas Brown. They are a high-net-value family, with four adult children and a variety of life insurance policies. They each have several term policies, they each have a whole life policy, there is a diminishing term policy on Thomas in place to pay the mortgage which is paid through the mortgage payment every month, and they each have an annuities and accidental death policies.

It’s complicated, but not impossible.

Assuming this divorce is somewhat amicable, the best thing Thomas and Judy can do is sit down and have a frank discussion about their policies and their goals. Perhaps they can agree that the purpose of life insurance is to create an instant estate for their children and name them as beneficiaries on every policy. That would be the easiest solution. Thomas and Judy would simply call every life insurance company they work with and give each child 25% of every death benefit.

The only hiccup in this case would be the diminishing term policy intended to pay the $4 million dollar mortgage should Thomas pass away. In this instance, it would be best to leave that policy alone for now. The house may need to be sold soon as assets are divided, so it may become a moot point.

Unfortunately, not every divorce is amicable. If Judy and Thomas can only communicate through their attorneys, they need to be straightforward about the life insurance policies in place. Their lawyers can battle it out over policy specifics if the Browns cannot come to an agreement.

Example 4: Life Insurance Issues When Divorcing a Disappearing Spouse

This sounds like a bizarre situation, but it’s not. In any given year in the US, there can be 500,000 to 100,000,000 missing adults. Some people seek divorces in this situation, and the laws vary from state to state about the time frame and asset distribution. Usually, after a year passes without contact, you can divorce a missing spouse.

If this is your situation, your best solution is to continue paying on any life insurance policy YOU OWN that names your spouse as the insured, and you as the beneficiary. Statistically speaking, only about 4,000 decedents in the US remain unidentified every year. Should your missing spouse pass away, it’s very likely they’ll be identified.

If you have a whole life policy, you could also choose to cash in the policy.

Remember, if your missing spouse is the owner of the insurance policy, they can change the beneficiary listed on a policy at any time, or cash it in, and that’s beyond your control. Don’t allow those premium payments to keep coming out of your (formerly joint) checking account. So, act on this when you feel comfortable and close that old bank account.

Now that we’ve explained how life insurance works during a divorce, let’s talk about how annuities work in a divorce.

How Do Annuities Work in a Divorce?

Many people think of annuities as investments, like the stock market or government bonds. But annuities are life insurance products, sold by licensed life insurance agents, not licensed stockbrokers. So we’ll cover them here.

Annuities are a type of investment usually made for the purpose of retirement saving. In addition to lifetime income after retirement, or income for a predetermined number of months, annuities almost always include a death benefit for a surviving spouse. The most common disposition of annuities during divorces is a simple 50-50 split. You’ll need to work with the insurer first, to see if this is possible.

For example, imagine Thomas and Judy, our wealthy family from the story above. They have invested in an annuity worth $50,000. The simplest option is to split this into two annuities, so each spouse gets a new annuity worth $25,000.

There can be complicated losses associated with this split if the annuity is significant. So, if you own an annuity worth more than $50,000, we’d recommend speaking with your insurance agent and your financial advisor and looking forward to determine the best action. Splitting it might not be the best decision for either party.

Up to this point, we’ve covered what happens to existing life insurance policies during a divorce. Now, let’s think about the future.

The Divorce is Final. Can My Ex Purchase New Life Insurance on Me?

Yes, but only if you allow it. Your ex may have significant financial interest in your wellbeing. Perhaps you pay child support or alimony. Or maybe they’re counting on you to finish raising the children. If they have a financial interest in your life, they can legally insure your life.

They cannot do it without your permission, however. And in most cases, you’ll need to either complete a quick medical exam, or fill out some paperwork about your health and sign it, before a life insurance policy will take effect. In short, your ex-spouse won’t be able to insure you without your knowledge, one way or the other.

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