Are life insurance proceeds marital property?
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Significant life events such as marriage and the birth of a child can impact the need for life insurance. Separation and divorce can also impact your need for life insurance — in some cases significantly. In addition to alimony, child support payments, and the division of marital assets, the court may weigh in on life insurance as well. In fact, courts will sometimes order individuals who don't already have life insurance to purchase a new life insurance policy in their divorce decree. Alternatively, those who already have a policy may need to make adjustments to ensure that the policy reflects their new circumstances. If you've recently separated from your spouse, this article can help you better understand how a divorce can impact your existing policy and the steps to consider taking as you move forward.
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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.
Choosing the right type of life insurance
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-efficient 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 permanent life insurance policy with a cash value component, 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.