With 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Ashley Kilroy Insurance WriterWith 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Written By Ashley Kilroy Insurance WriterWith 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Ashley Kilroy Insurance WriterWith 15 years of immersion in the world of personal finance, Ashley Kilroy simplifies financial concepts for individuals striving toward financial security. Her expertise has been showcased in reputable publications including Rolling Stone, SmartAsse.
Insurance Writer Les Masterson Deputy Editor, InsuranceLes Masterson is a deputy editor and insurance analyst at Forbes Advisor. He has been a journalist, reporter, editor and content creator for more than 25 years. He has covered insurance for a decade, including auto, home, life and health. Before cove.
Les Masterson Deputy Editor, InsuranceLes Masterson is a deputy editor and insurance analyst at Forbes Advisor. He has been a journalist, reporter, editor and content creator for more than 25 years. He has covered insurance for a decade, including auto, home, life and health. Before cove.
Les Masterson Deputy Editor, InsuranceLes Masterson is a deputy editor and insurance analyst at Forbes Advisor. He has been a journalist, reporter, editor and content creator for more than 25 years. He has covered insurance for a decade, including auto, home, life and health. Before cove.
Les Masterson Deputy Editor, InsuranceLes Masterson is a deputy editor and insurance analyst at Forbes Advisor. He has been a journalist, reporter, editor and content creator for more than 25 years. He has covered insurance for a decade, including auto, home, life and health. Before cove.
| Deputy Editor, Insurance
Updated: Jul 9, 2024, 7:19am
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Divorce and all the things that come with it can be overwhelming. Even the friendliest of divorces can leave you figuring out finances, determining how to split belongings and, if there are children, making custody agreements. Because there are so many moving parts during and after a divorce, life insurance might be an afterthought.
Life insurance can help protect the assets you’ve worked to build, and that becomes even more important after a divorce.
Married couples often purchase life insurance to cover existing or anticipated debts or other financial responsibilities. Even when a couple decides to go their separate ways, these obligations may remain. That’s why existing life insurance considerations can be an important component of a divorce.
To ensure all life insurance has been accounted for, you may need to provide documentation of all your current assets, liabilities and insurance policies, pending a divorce complaint. For example, New Jersey requires each spouse to provide an Affidavit of Insurance Coverage at the beginning of a contested divorce case. This document outlines all policies you and your spouse had in place at the time you filed for divorce, as well as policies that have been canceled within the past 90 days.
Taking an inventory of all current insurance policies will help divorce proceedings.
How you handle life insurance requirements will be determined by your current and future life insurance needs as well as the affordability of keeping the policies. For example, let’s say you and your spouse each have a term life insurance policy and decide to keep the policies. You might each decide to be both the owner and beneficiary for the other person’s policy.
If you have a cash value life insurance policy, you and your spouse may decide to terminate the policy and then divide the cash value equally.
Other considerations may include surrender charges, which will reduce the surrender value of a policy.
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When consulting with your attorney, keep in mind the fundamentals of why you purchased life insurance in the first place. Your attorney should then help you determine the future purpose of your existing and new policies in the context of the divorce. Some questions you may want to ask your attorney include:
Since life insurance is usually part of a broader financial or estate plan, it’s wise to consult with a financial planner who can guide you and help you assess the affordability of life insurance and the amount of coverage you need.
Chris Chen, CFP, of Insight Financial Strategists in Massachusetts, says, “Divorce gives individuals the opportunity to determine how they want to live separately and also of how they want to provide for the children they have together. For example, the supporting spouse may decide they will pay for their child’s college expenses. Therefore, they would want to determine if they need additional insurance coverage to account for this potential cost in the event that they pass away prematurely.”
While marital assets are often split equally among the two parties, a court might determine that one spouse must make monthly alimony or child support payments to the other. These payments will ensure that the children are provided for and the dependent spouse is appropriately compensated after the divorce.
Generally, if there is a child support or alimony obligation, the court will require the spouse paying the support to have life insurance in place. If the spouse making payments already has a policy such as a group life insurance policy, the opposing attorney may require them to keep it.
If they don’t have a policy, they may have to purchase life insurance to ensure there’s still financial support if they pass away.
Both ex-spouses will need to work with their respective attorneys to decide the amount of the policy, who owns the policy, who pays the premiums, who are the beneficiaries, and how much of the policy goes to each beneficiary.
Rajeh A. Saadeh, a practicing divorce attorney in New Jersey, says, “In some instances, a payor may not qualify or can’t afford a life insurance policy. In this case, an alternative option would be to use a constructive trust, which sets aside a portion of the payor’s assets to secure future support just in case the payor passes away.”
Here are a few of the most common life insurance problems that arise during and after a divorce.
Sometimes the policy owner will make changes to the policy without alerting the beneficiary. For example, if an ex-spouse is providing support and owns a life insurance policy, they can change the beneficiary and never notify the other ex-spouse.
Or a policyholder might stop paying the premiums or allow the policy to lapse. This could terminate the policy, leaving the other ex-spouse without a financial safety net in place.
But there are ways to avoid these problems. One option is for the spouse receiving support to own the life insurance policy. This gives you full control over the payments and the naming of beneficiaries.
Another option is to have third-party authorizations on the account so you can obtain information if changes are made or an alert if the policy is about to lapse.
By having third-party authorizations, the ex-spouse can learn of changes to the life insurance, such as beneficiary changes, directly from the insurance company. This way, the ex-spouse receiving alimony or child support can ensure the policy is active and is safeguarding the support payments.
Financial circumstances can change for both parties after a divorce. You may need a reallocation of support if the payor loses his job or the recipient of alimony begins to make significantly more than the payor.
“When there’s a recalculation of support, there must be a reallocation of life insurance obligations. Since circumstances often change after a divorce, the family can go back to court to reallocate the support and life insurance obligations. However, if possible, handling these matters outside of court is more cost-effective and recommended,” says Saadeh.
Life insurance needs can also change over time. For example, if a payor is responsible for paying $100,000 in alimony over 10 years, the payor may only need a 10-year $100,000 life insurance policy. If the payor has already paid $50,000 in the first few years of support, they no longer need a $100,000 life insurance policy to protect the compensation. A divorce agreement may permit the payor to step down insurance over time as support is paid.
The payor could reduce coverage or add a new beneficiary to receive 50% of the life insurance death benefit.
It’s important to note that the insurance company will not automatically do this, it’s up to the policyholder to make these changes.
“The right type of insurance will depend on what you already have,” says Chen. “Generally, since cash is short all over, term life insurance is a good solution for many different financial situations.”
Divorces are financially and emotionally complex. Your life insurance needs will depend on your financial situation and what you and your ex can reasonably afford. Taking the time to assess all of your options—and your longer-term financial plans—will help you determine the best way to protect assets after going your separate ways.
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