- The purpose of life insurance
- Two types of life insurance
- Determining the cash value of your whole life policy
- The cash value of a term life insurance policy
- What to do with your life insurance after divorce
- Why a judge might order you to maintain life insurance on yourself
- Why it's smart to take out a life insurance policy on yourself
- Why you might want to take out a life insurance policy on your ex
- Final note: changing your beneficiary
Life insurance isn't something most people like to dwell on. But if you're divorcing, your life insurance policy is something you should definitely think about. For example, if your policy has cash value, it is considered a marital asset – and a huge part of the divorce process involves dividing assets between the two of you.
Asset division isn't the only reason life insurance is a critical issue in divorce. If you have kids, you want to make sure they're covered in the event that you or your spouse were to die. You might need to buy a new policy after divorce. Or, you may need to establish a custodian or trustee who would disburse pay-out money to your kids in the event of your death.
In this article, we explore the basics of life insurance and answer some important life insurance questions asked by divorcing couples.
The purpose of life insurance
Simply put, life insurance provides money to your beneficiaries in the event of your death. Your beneficiaries can use the money to cover your funeral expenses, pay your debts, and meet their own costs when you are no longer there to provide for them. If you have a house with a mortgage or kids to put through college, a life insurance payout can help with those expenses, too.
Two types of life insurance
Most life insurance policies are individualized rather than joint life insurance policies. That is, each person in a couple maintains their own policy on themselves. There are two primary types of life insurance: term life insurance and whole life insurance. It's vital that you understand the difference between the two because each requires a different set of actions in divorce.
Term life insurance
As the name suggests, term life insurance lasts for a specific term – a set number of years. This means your policy may very well expire before you die. Some term life insurance policies can be renewed. In fact, people often buy them intending to renew until they die. (Term life insurance is a lot cheaper than whole life insurance.)
Note that if you intend to renew a term life insurance policy, you may have to take a medical exam first. Some people invest in term life insurance when their kids are young but don't renew it when their kids come of age. For example, they may take out a 20-year policy when a child is born and let it expire when the child turns 20. This can be a fairly inexpensive way to ensure your offspring while they're young (many term policies cost $20 or less per month). However, if you outlive the 20-year term, nobody gets any benefits.
Whole life insurance
This type of life insurance covers you for life – you never have to renew it – and it pays your beneficiaries no matter when you die. Notably, the premiums for a whole life insurance policy are much higher than for term life insurance (often $200 or more per month).
Whole life insurance policies accrue cash value over time because the company invests your premiums in the market and shares some of the profit with you. That's a nice benefit, but if you're divorcing, the cash value of your policy is an asset you must consider in your legal settlement.
Determining the cash value of your whole life policy
When you divorce, all of the assets and debts you accrued during your marriage must be divided, equalized, or assigned. The cash value of your life insurance policy is the amount of money you'd get if you were to cash out the policy rather than wait to receive a death benefit.
As we mentioned, divorce, it's considered a marital asset. If you're divorcing or anticipating a divorce, check the cash value of your policy because you will likely be splitting its value with your soon-to-be ex-spouse.
How much cash is your life insurance policy worth? It depends on the details of your policy. The best way to get an accurate answer is to contact your insurance agent. Add this to your checklist of things to do when getting divorced.
The cash value of a term life insurance policy
This one's easy: A term life insurance policy has no cash value. Therefore, it is not considered a marital asset. You don't have to worry about splitting the value of a term life insurance policy with your ex. But, depending on your situation, a term life insurance policy may still be quite valuable to you.
Further, you just might be ordered by a judge to maintain a life insurance policy. This is called court-ordered life insurance, and it happens more often in divorce settlements than you might think. Even if life insurance has not been court-ordered, it's a good idea to maintain a life insurance policy on yourself if you have kids who depend on you for financial support.
What to do with your life insurance after divorce
So far, we've talked about possible scenarios that might arise with your life insurance after you get divorced. Keep reading to find out why you might be ordered to maintain life insurance, why you should consider maintaining a policy on yourself, and why you might want to take out a life insurance policy on your ex.
Why a judge might order you to maintain life insurance on yourself
If you will be paying alimony or child support to your ex, the judge may order you to maintain life insurance as part of your divorce decree. But who would get your insurance settlement? Court-ordered life insurance helps guarantee that, in the event of your death, your dependents (ex-spouse, children) would still receive financial support.
You will need to name a beneficiary in your court-ordered policy. Naming your ex-spouse is an option, and you could do so if you trust them to use the money for the good of your child. Naming your child is another option; however, if the child is a minor when you die, a guardian would likely be appointed to manage the money anyway.
A third option is to name a custodian or trustee who will make sure the life insurance payout gets distributed to your child. If you're unsure which option is best, contact your life insurance agent, or reach out to us at Hello Divorce for expert legal advice.
Why it's smart to take out a life insurance policy on yourself
Even if the judge doesn't order it, if you have kids, consider taking a life insurance policy out on yourself if you don't already have one. Why? If you were to die before your kids come of age, there will be money to cover their expenses. This is particularly important if you're divorced and your ex has vanished from the picture.
You cannot count on your ex to pick up the slack if you die. But you can count on your life insurance policy to provide a death benefit to your survivors.
Why you might want to take out a life insurance policy on your ex
You may be wondering if you are entitled to a portion of your ex's life insurance policy if they were to die. The answer: not necessarily.
If you will be receiving child support from your ex and the court did not order them to maintain a life insurance policy naming you as beneficiary, you might want to take out a life insurance policy on them yourself. That way, if your ex were to die, you'd still have the life insurance benefit to lean on.
You will need your ex's cooperation on this. They must be willing to sign an application, go through the underwriting process, and possibly take a medical exam. And they might not want to pay the premiums for this policy, which means you'd need to pay them yourself.
If all of this sounds daunting and you want a little help, consider hiring a mediator to help you and your spouse to come to an agreement on your divorce settlement, including life insurance matters.
Final note: Changing your beneficiary
The act of divorce does not automatically change the beneficiary of your life insurance policy. If you want to make that change, you must do it yourself.
Note that the beneficiary of a life insurance policy cannot be changed after the insured person dies. You probably designated your spouse as the primary beneficiary at one time. But things have changed now, and you might want to remove their name. This is easy to do if you have a revocable life insurance policy. Simply contact your agent and ask to change your beneficiary. They can supply the forms you need to get this done.
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