Episode 58 of the Divorce and Your Money Show discusses the role of life insurance in divorce.
Life insurance pays a benefit to whomever you designate upon your death. In general, there are two types of life insurance: term insurance (which covers a specific time period) and permanent insurance (which lasts throughout your lifetime).
Life insurance plays very important roles in divorce, and they are not intuitive or connected. Therefore, you might not normally consider these three items:
1. The cash value of life insurance might be considered a marital property.
In some types of permanent policies, your premiums get invested. And over time, they build up cash value. This value can be borrowed with a very low interest rate.
If you have a permanent life insurance policy, and you’ve been paying premiums for a long time, it can build up a substantial value. That’s why insurance needs to be considered during a divorce settlement. (Keep in mind that term life insurance policies usually don’t have any cash value.)
2. Change the name of the designated beneficiary.
Usually, your spouse is the beneficiary in the life insurance. Once you’re going through a divorce, you also need to update their name on the policy.
3. Use life insurance to secure spousal and child support payments.
This process is delicate, and you’ll have to work very closely with your attorney to make sure that it gets handled in the right way. Maybe your ex-spouse is supposed to pay you spousal or child support for a set period of time.
Usually, these payments are very important to your finances. So if your ex-spouse passes away, those payments will be cut off. The solution is to keep those payments coming as long as they’re owed through a life insurance policy—even if the person is no longer living.
During the settlement, your spouse could be required to purchase a life insurance policy—and enlist you as a beneficiary as long as they’re supposed to pay you alimony and child support. With each passing year, the value of the policy can be decreased according to the amount of support they’re supposed to pay.
These are some questions to think about as you present this option to your attorney:
- Who owns the life insurance policy?
- What are the benefits of having the life insurance policy paid to you, rather than a trust?
- What happens if your ex-spouse doesn’t pay the premiums on the policy?
- What happens if the beneficiaries are changed? How could that be prevented?
- This option is very complicated, so you need to do your research, and have a good attorney and financial team that understands the pros and cons of using it.
Key Learning Points:
- Life insurance plays very important roles in divorce, and they are not intuitive or connected.
- Premium life insurance policies invest premiums over the years, and they can amount to a huge value.
- Update the name of beneficiaries after your divorce.
- Secure spousal and child support payments.
- During the settlement, your spouse could be required to purchase a life insurance policy—and enlist you as a beneficiary as long as they’re supposed to pay you alimony and child support.