Life insurance during and after divorce

Life insurance beneficiary rules after divorce

Life insurance is designed to protect those closest to us, most often our family. Because divorce directly impacts families, it’s important to reevaluate your life insurance policy and named beneficiaries during the process. Depending on the type of policy and your family’s needs, life insurance after divorce may be handled a few different ways. The court will take existing policies into account and may require the purchase of new life insurance policies as part of the settlement.

Life insurance steps to take during divorce

If you have existing life insurance policies going into a divorce, you will want to take to make sure they are updated and serving their intended purpose. Evaluate the life insurance policy, your financial goals, and your new outlook by taking these steps when going through a divorce:

Update your beneficiaries

Couples often name each other as beneficiaries on financial accounts like retirement plans and life insurance policies. If no children are involved, you can usually call your insurance company and ask them to remove your ex-spouse as a beneficiary. If you have children, they may be your preferred choice for beneficiaries. However, it’s worth noting that legal complications and delays in benefit payments can result from naming minor children as beneficiaries. The good news is you can still protect your young children with life insurance, even if something were to happen to you before they become adults. There’s more on that below. 

Make sure children are financially protected

To protect your minor children, you can purchase life insurance after divorce with enough coverage to replace your income until they’re grown—and perhaps help with college or other goals. However, minors cannot legally own property, so if you were to pass away while they’re young, the court would have to appoint a custodian to manage the funds for them. This can be costly and cause delays at a time when they need support the most. One way to avoid these complications is to set up a living trust and name it as your life insurance beneficiary. The trustee, an adult of your choice, would then manage and distribute the funds for the benefit of your children according to the instructions included in the trust.

Include the cash value in your net worth

Ahead of the divorce proceedings, you’ll need a detailed accounting of your finances, including any life insurance. If you have a whole life insurance policy, the policy’s cash value is usually considered an asset because it can be accessed during your lifetime. You’ll need to include this amount in your net worth for the court to consider when dividing the marital assets. In many cases, the court may direct you to surrender the policy and split the proceeds in the settlement. Term life insurance , on the other hand, will usually remain with its owner, and you can change the beneficiary to suit your new circumstances. 

Life insurance when separated

Although a legal separation doesn’t end a marriage, it outlines the rules and responsibilities of each person and provides for their financial separation much like a divorce would. As a result, it makes sense to consider the same life insurance steps during a separation as you would during divorce.

Court-ordered life insurance and divorce settlements

It’s become common for courts to require divorcing spouses to purchase life insurance policies as part of the settlement. This is often the case when one spouse earns significantly more than the other or when young children are involved.

A life insurance policy can be ordered to protect alimony or child support payments in case the person responsible for those payments were to pass away. Although a noncustodial parent may be required to pay the premiums, the custodial parent may request ownership of the policy in certain circumstances. This allows them to be notified by the insurance company if changes are made to the policy or to take over the premiums if the other parent defaults—a condition which would cause the policy to end.

While the court may require the purchase of a life insurance policy, the details of the policy are often left to the individual. When a term life policy is for the benefit of a child, it may be possible to petition the court to step-down the amount of coverage as the child gets closer to adulthood.

Life insurance on an ex-spouse

Outside of protecting young children, most states don’t allow a person to own a life insurance policy on an ex-spouse. After divorce, they’re no longer considered to have an insurable interest. However, a divorce decree does not automatically change the beneficiary on a policy. You must contact the insurance agency and request the change. 

How much life insurance should I have after a divorce?

After a divorce, your coverage should suit your new circumstances. Aside from updating your beneficiaries, you’ll want to determine if you need more coverage or less based on your beneficiaries and their needs. Speaking with a professional financial professional can help you plan for your life insurance needs after divorce.

Life insurance during divorce FAQs

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