The purpose and need for life insurance doesn’t go away when couples split up. Life insurance can provide the resources to raise children when one or both parents die, and it can replace spousal support that a deceased ex would have paid to the lower-earning party in a divorce. Continuation of life insurance is often an element in court orders and settlement agreements in divorce proceedings.
Term Life Insurance
Term life insurance is the simplest variety of life insurance, and terminating it requires no effort beyond not making the payment. Term life is purchased for the month, quarter or year, and the price often changes upward over time with the expected risk because of age or health habits. A spouse who is the beneficiary of a term policy may find herself without resources to pay off family bills and raise children of the marriage if an angry ex lets the payments lapse and then dies.
Whole Life Insurance
Whole life insurance, also called permanent life insurance, is often treated as an asset in divorce, because it is viewed as an investment. The payments for whole life remain the same from year to year and accumulate cash value over time. This value can be awarded as a death benefit to spouse or children, cashed in for money or be used as security for a loan. A couple who have been paying on a whole life policy should be careful of making unilateral changes to the policy before a divorce is final. A judge may view this as taking a marital asset and rule that money is owed to the other party.
Generally speaking, divorce courts view any earnings, property or equity increase acquired in the time the couple were married to be equally owned by both. Spouses can own sole and separate property in these states–when property was owned before marriage, for instance, or property documents clearly state that the property is separate. But many people have been surprised to discover that value gained in some types of separate property after the marriage is community property. This applies directly in the case of a whole life policy that has accumulated some cash value. Even if it was owned before the marriage, the value accumulated during the marriage may be treated as a joint asset.
Family court judges may make orders regarding both types of insurance. For instance, the spouses may be ordered to obtain or retain term policies until the children of the marriage have reached a certain age, or until one party or the other can become financially independent. For practical reasons, a short-term order–if the children are almost grown, for instance–usually calls for a term policy, while lengthier orders may call for either.
Post-divorce policies may be a challenge to structure and require a certain amount of due diligence on the part of the beneficiary. Care should be taken to ensure that the beneficiary’s choice for succession–most often her children–are correctly listed as next-in-line beneficiaries in the event of her death or incapacitation. Attorneys also recommend that a mechanism be in place for the beneficiary to receive an annual or biannual report on the status of the policy.
Change of Beneficiary
Many divorces commonly contain language that declares this or that asset to be the property of one party or the other, so the ownership of a whole life policy, and permission to change the beneficiary, may be designated in orders. However, the court order is not enough, in and of itself, to keep the former spouse from collecting the life insurance. He must be specifically removed or replaced as beneficiary in order to be prevented from collecting the insurance money.