Of the two main types of life insurance, permanent and term, only permanent is usually a significant part of a divorce settlement.
Permanent life insurance — whether whole life or universal life — provides coverage for the lifetime of the insured as long as premiums are paid, though Universal allows greater flexibility in terms of payments and death benefits. The biggest distinction is that with whole life, savings grow at a guaranteed rate; with Universal life insurance, savings vary depending on the premium structure and market performance.
During divorce proceedings, attorneys and the court will investigate whether the couple has permanent or term life insurance, and the extent to which the insurance is needed as part of the settlement.
Term life, which lasts for a set period, has lower premiums than permanent, but no cash value. Because it has no cash value, it’s not usually considered an asset when dividing property during the divorce process.
However, there is an exception. In some states, if one spouse is ordered by the court to provide life insurance, and that person is uninsurable but has a term life insurance policy, the existing policy may be considered a marital asset.
When a life insurance policy is considered an asset in the divorce, the divorce will not automatically change the policy owner, the insured, or the policy beneficiary. However, the final decree may include language that invalidates a spouse as a beneficiary under a policy or stipulates that the parties take specified actions with respect to obtaining or changing existing life insurance policies. For example, the final decree can also specify that joint or survivorship policies be split into separate policies for each spouse.
Unless otherwise specified by the court in the final decree, divorcing couples can make changes as to who the beneficiaries are. For example, if a husband owns a life insurance policy that insures him and lists his soon-to-be ex-wife as the beneficiary, the husband can change the beneficiary. Again, however, the divorce agreement may say otherwise. The judge might have agreed to constrain the husband from changing the beneficiary if the husband owes the spouse alimony or child support.
The cash value of a permanent life policy will often be part of the settlement. But if it’s not part of the settlement, it may also be a source of funds to help with divorce-related expenses.
Ex-spouses May Be Required to Purchase Insurance
Divorcing couples who don’t have permanent life insurance might want it stipulated that the ex-spouse purchase it to protect alimony payments, child support payments and pension or retirement funds. This is one way to ensure that those financial obligations are met even if the breadwinner dies.
If a divorce decree is issued requiring court-ordered life insurance, the ex-spouse, who is paying for the policy, usually will receive a deadline. If so, it’s best to apply for the insurance immediately because it can take four to six weeks to get a signed policy.
In these situations, both ex-spouses need to work together along with their attorneys to set up the policy to decide who will be the owner; the term, the coverage amount and who will pay the premiums. Attaching riders to the policy may also be considered, such as adding a long-term care rider to the policy to pay for in-home or nursing home care.
Once the details are finalized and the policy is obtained, a signed copy of the application must be provided to the court as proof of compliance.
For help understanding how life insurance can be a resource for financial planning and special situations, please contact us.