Court-mandated life insurance for those without coverage

In a growing number of divorce cases, the court will order one or both parties to purchase a life insurance policy as part of the overall divorce settlement. The policy is typically meant to serve as financial protection for the ex-spouse and any minor children who depend on the higher-earning spouse for financial support. However, while a divorce decree or separation agreement may require that you purchase a policy, the type of life insurance and how much coverage you purchase will likely be left up to you to decide. A good place to start determining how much life insurance you'll actually need is calculating how much alimony or child support you're responsible for until your youngest child is out of the house and financially independent.

What kind of policy should you get? There are many different types of life insurance, but whole life and term life policies are among the most popular options. Whole life insurance policies provide permanent, life-long coverage with the added advantage of cash value: a tax-advantaged asset that can be tapped into during your lifetime.1,2,3 Term life insurance is typically less expensive, but coverage is limited to a specific period of time (terms typically last 10, 15, 20, or 30 years), and these policies don't build cash value. The biggest potential drawback of term policies is the fact that after the term ends, your beneficiaries won't receive any funds from the policy if you pass away. If you have a financial professional, ask them what kind of coverage is best for your financial circumstances at the time of the divorce. Or, to get an estimate of how much a term life insurance policy could cost you, you can use this quick tool to get a quote.

What to do with life insurance coverage you already have

If you currently have a policy, you may want to make adjustments to your coverage as you undergo a separation or divorce. Start by reading through your policy to determine the amount and what kind of coverage you have, how long it will be in effect (if it's a term policy), and the named beneficiary or beneficiaries (which will typically include the spouse you are about to divorce). If you have a permanent whole or universal life policy, contact the life insurance company to determine how much cash value has accumulated. Then consider the following issues to help ensure the policy continues to meet your needs.         

Updating beneficiaries

Most people list their spouse as their beneficiary, so it's important to consider how you want to handle this. You may want to name your children as beneficiaries, but if they are minors, that can be complicated. Consider creating a trust tasked with dividing policy proceeds among your children. On the other hand, if your soon-to-be ex-spouse has custody of the children and the split is relatively amicable, you may wish them to have the death benefit. If no children are involved, think about whether you want to leave the death benefit to other relatives. Or, consider making beneficiary designations to charities or causes you care about -- the cash payout doesn't have to go to a person.

Accounting for cash value in a permanent policy

If you have a policy with a cash value, it may be considered a marital asset and subject to division by the court like all your other marital property. In some cases, you and your ex may be able to cancel the policy and split the cash value or access it in another way. Contact your insurance company or broker to find out what your options are.

Protecting alimony and child support

As noted, a significant number of divorce settlements now require life insurance to protect child support and alimony payments to your former spouse in the event you pass away. However, if the policy's death benefit is larger than the amount needed for this purpose, consider re-apportioning a part of the death benefit to others – the payout doesn't all have to go to one person.

Keeping a policy on an ex-spouse

In some cases, you may want to pay to keep a spouse's policy in effect (or get a new one) even if the court doesn't mandate coverage. This is a problem in many states that assume you don't have an "insurable interest" in your ex-spouse. However, even in situations where it's not prohibited (because, for example, you have an interest in your ex-spouse's ability to provide support), you will need your ex-spouse's cooperation: as long as the policy is in their name, they have the right to change beneficiaries or access cash value, even if you’re paying the premiums.    

Protecting child support for minor dependents

If you have minor children, you'll want to take their support into account regardless of what the courts mandate after your divorce. These concerns are even more pressing if there's a significant income disparity between you and your ex and you share custody of minor children. Some divorce decrees will order the higher-earning spouse to obtain life insurance to protect future child support payments. Still, even if it doesn't, you may want to consider purchasing a term life insurance policy, which allows you to choose a term of 10, 15, or 20 years that will cover those payments until the children become adults.

If you are currently going through a divorce, we suggest talking to a knowledgeable insurance professional who can answer detailed questions about your evolving life insurance needs. If you don't have someone to discuss insurance with, Guardian can help you find a nearby financial professional who will take the time to learn about your situation and guide you to options that are a good fit for your needs.

Frequently asked questions about life insurance and divorce

What happens to life insurance upon divorce?

Every state is different, but any life insurance purchased during the marriage could be considered marital property. If so, your policy – and any built-up cash value – will typically be counted in with all your other assets that must be divided upon divorce.

Can you keep life insurance on an ex-spouse?

You typically can't keep life insurance on an ex-spouse. Many states will prohibit you from being the policy owner because, as a divorced person, you no longer have an "insurable interest" in your ex. However, if there are insurable financial interests – for example, because your ex needs to make alimony payments -- you may be able to maintain a policy if your ex agrees. In many circumstances, exes are required to take out (and pay for) life insurance policies, particularly if there are children that depend on your ex for support.

Why is life insurance important in a divorce?

Life insurance policies are important in a divorce agreement because they are a source of financial protection and may also be an asset. Courts will often mandate coverage to ensure continued alimony or child support payments if an ex-spouse dies. Also, if you or your ex has a permanent life insurance policy with cash value, it will likely be considered a marital asset, which will need to be split upon the divorce.

Is life insurance a marital asset?

Whether or not a life insurance policy is considered a marital asset depends primarily on your coverage. For instance, if you have a whole life or universal life insurance policy with a cash account, it is typically treated as an asset of the marriage. On the other hand, term life insurance policies don't have cash value and usually aren't counted as marital assets in divorce settlements.

If a life insurance policy names a spouse as the beneficiary, is that changed by divorce?

Some states have "revocation-upon-divorce" that automatically removes an ex-spouse as a life insurance beneficiary after a divorce. In such cases, it is essential to name a new beneficiary. However, if it is a group insurance policy (for example, through work), the terms are governed by the Federal ERISA statutes, which say a beneficiary designation cannot be changed simply by the act of divorce. In other words, the answer depends on where you live and what kind of policy you have.

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Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial professional and refer to your individual whole life policy illustration for more information.

3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

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