Divorce Impact on Life Insurance Needs
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It’s essential to consider your life insurance needs before getting divorced so that the proper provisions can be included in the settlement. This is particularly important as a partner’s death during marriage often means their assets pass on to the surviving spouse, who typically does this by providing for their children. However, divorce complicates this process and requires more consideration and preparation.
If you own a life insurance policy that features you as the insured and your ex-spouse as the beneficiary, it is possible to update the beneficiary designation to remove them. However, if you have an alimony or child support agreement in place, a court of law may require you to maintain the existing beneficiary status to ensure that financial support is provided when you pass away.
It’s important to remember that your life insurance policy may not automatically adjust with the change in circumstances. You’ll need to contact your insurer to modify or update who is listed as your policy’s beneficiary.
The process for updating your policy’s beneficiaries depends on each provider, but typically it can be done online, over the phone, or through a paper form. As the policy owner, you’re the only one who can update the beneficiaries of your policy. However, if your ex-spouse has been listed as an irrevocable beneficiary, their consent is required before they can be removed and other changes may also need their approval.
Provision for Child Support or Alimony
A prudent course of action is to have the divorce agreement specify how much insurance coverage must be maintained by one’s ex-spouse – especially if they are responsible for paying child support or alimony. If something happens to the ex-spouse, the insurance proceeds can be used to provide ongoing financial support for any dependents or alimony payments.
Changing Beneficiary Designations & Allocations
If you own a life insurance policy (not provided by an employer), you will need to review and alter the beneficiary designation and allocation accordingly.
If you’re recently divorced and considering changing your life insurance beneficiary from your ex-spouse to your children, it’s important to understand the legal implications of doing so. While it may seem like the right way to ensure financial protection, it is not recommended due to a minor’s inability to accept the death benefit. If you die and your beneficiary is under the age of the majority, courts must appoint a legal guardian to decide how to handle the funds – which can take years to sort out.
Fortunately, there are three ways to make sure that your children receive the death benefit in accordance with your wishes: appointing a custodian to control the funds; setting up a trust; or keeping your ex-spouse as the beneficiary if they are still co-parenting with you and financially responsible for the children. When choosing a custodian, be sure to designate someone trustworthy who will act in the best interest of your children. With a trust, specific assets, beneficiaries, and a trustee to manage it can be specified. Whatever route you choose, it’s important to ensure that your loved ones are adequately taken care of should anything happen to you.
Transferring Ownership of Policies Owned B y Your Ex-Spouse
When attempting to transfer ownership of a policy underwritten by your ex-spouse, they must be the ones performing all the necessary changes regarding its beneficiaries. You are not obligated to pay the premiums of any policies owned solely by your ex-spouse unless required through the divorce settlement.
Additional Coverage If Financial Support Role Is Reassigned
In cases where a divorcee becomes largely responsible for their dependents’ finances, it may be necessary to reassess how much coverage is currently in place. This could mean removing supplementary policies that reflect one’s current circumstances more accurately.
Court-ordered Life Insurance
If you’ve been ordered by the court to purchase a life insurance policy as part of your divorce settlement, it’s important to start the process immediately. The application process can take up to six weeks – or even longer if supplemental information is needed or your application is rejected – so aim to start at least six months in advance, if possible.
You must also communicate with your former spouse and respective lawyers throughout the process. You’ll need to discuss how to set up the policy to ensure your former spouse receives the benefit: either they can be the policy owner and beneficiary, or you can be the owner and name them an irrevocable beneficiary. This way, no matter what happens, your ex will have financial security after death.
Life Insurance After Divorce
When you purchase life insurance following a divorce, it is important to ensure you have adequate coverage to protect the people who will be left behind when you are gone. Insurance advisors typically recommend that individuals obtain a policy that provides at least 10 to 15 times their annual income. But more importantly, your coverage should be sufficient to meet all of your financial obligations after your death, including:
Childcare
Raising a child up to 18 can cost upwards of $250,000. The death benefit from your policy can provide for their daily needs or educational expenses.
Dependents
If you are responsible for caring for an aging parent or family member, ensure that your life insurance coverage considers the continued care they will need.
Income Replacement
Even if you are not bringing in an income or are managing services around the home, your death could still have an economic impact on those who depend on you. Take this into consideration when deciding how much life insurance coverage to buy.
End-of-Life Expenses
Funeral costs can run up to $10,000 or more, so leaving behind funds for your family through life insurance can alleviate the financial strain of covering those costs.
