What happens to life insurance in a divorce?

If you are in the midst of a divorce, wait to make any changes to your life insurance policy. Divorce is a complicated business; you should talk through any life insurance adjustments with your attorney and other financial experts.

That doesn't mean you should ignore your life insurance, however. Life insurance may be a part of your divorce settlement, and if so, you’ll have to address it.

During a marriage, it is common for couples to choose each other as the beneficiaries of a life insurance policy. But after a divorce, you almost surely will need to change the beneficiary from your ex-spouse to someone else.

In fact, some states prohibit insurers from paying out a death benefit to an ex-spouse unless the divorce decree requires them to do so.

Some types of life insurance also hold cash value that builds in the account over time. When this is the case, it often makes sense to list this money as an asset to be divided during divorce.

"Life insurance policies with a cash value component, like whole life or universal life, can be considered as shared assets during divorce proceedings," says Amanda Kuhl, vice president and head of life products at New York Life.

By contrast, a term life insurance policy, which does not have cash value, is often considered a separate asset, she says.

Talking to an attorney can help you decide the best approach to dividing any cash value tied to a life insurance policy.

Can you keep your ex-spouse on life insurance after divorce?

The answer to this question is complicated and depends on where you live and the personal circumstances of you and your ex-spouse.

On the one hand, many states have laws that prevent a life insurance company from paying out a benefit to an ex-spouse unless the terms of the divorce mandate it.

In other situations, you can be required to purchase a life insurance policy and name your spouse as the beneficiary for reasons related to child support or alimony.

How long can you stay on an ex-spouse's insurance after divorce?

The answer to this question depends on the state in which you live. In many states, insurance companies are prevented from paying out life insurance proceeds to an ex-spouse. In such instances, you would no longer be eligible for a death benefit after the divorce becomes official.

It might be possible to re-designate your ex-spouse as a beneficiary after the divorce if your state allows it. It’s wise to consult with an attorney to determine your options based on your circumstances and the state in which you live.

How do you change a life insurance beneficiary during a divorce?

Chances are good that after a divorce, you will want to change the beneficiary of your policy if it currently is your ex-spouse. Bear in mind that you might not to able to make any changes until the divorce is final.

"While it’s important to regularly ensure your beneficiary information is updated, it’s especially critical in the event of a divorce," Kuhl says.

Changing your beneficiary is relatively straightforward. You simply follow the procedure outlined by your insurer, which typically involves filling out a form and returning it to the insurer.

If you drop your ex-spouse as a beneficiary, you will have to name a new beneficiary. Many people who are getting divorced want to name their children as beneficiaries, but this can raise issues if the children are minors, as the insurer will not be able to give them funds directly.

One solution to this problem is to name an adult custodian or to receive the benefits on the children's behalf.

What is court-ordered life insurance?

A court may order you to maintain life insurance after a divorce. This is most likely to happen when the court wants to ensure additional funding for child support should one of the former spouses die.

In such situations, you may need to name your ex-spouse as the beneficiary.

If you stop paying life insurance premiums, the court could file an order to force you into compliance. Also, in these situations, you might not be able to change your policy or your beneficiaries without prior approval.

It is a bad idea to ignore this type of court order. If you have concerns, it is much better to hire an attorney to help you with the court order.

Even if a court does not mandate life insurance, it often makes sense to purchase a policy that will protect the well-being of your children.

"If minor children are a consideration in divorce proceedings, it’s critical to ensure both spouses maintain enough coverage to replace parental income should something happen," Kuhl says.

She notes that parents may want to ensure their children are supported until they are 18, through college, or even into adulthood.

"It’s important to define the length of time children should be supported -- and the potential costs beyond day-to-day needs -- and ensure the proper coverage is in place," Kuhl says.

How do I buy life insurance after a divorce?

Buying life insurance after a divorce is no different than purchasing it when you are married. You have to decide which type of life insurance makes sense for you – for example, permanent or term – and settle on a dollar amount of coverage.

You also need to decide who the policy's beneficiaries will be.

"It’s important to seek the help of a trusted financial professional to ensure you’re adequately covered and can make the most of your policy, especially in the event of a divorce," Kuhl says.

The one situation where buying life insurance after a divorce might change is if a court mandates that you buy a policy to provide funding for child support. In such situations, you must follow the terms agreed to as part of your divorce settlement when purchasing a life insurance policy.

Sources:

  1. American Income: Life Insurance after a Divorce
  2. MassMutual: Divorce and life insurance policies
  3. Simple Insights: Tips for managing your life insurance after divorce
  4. FidelityLife: What happens to life insurance during a divorce

Frequently asked questions: Life insurance and divorce

Can I keep life insurance on my ex-husband?

Most of the time, no. Many states prohibit insurers from paying out life insurance proceeds to an ex-spouse. As mentioned above, a court order can change that.

The laws surrounding whether an ex-spouse can collect a life insurance benefit are complicated and vary from state to state. Consult with a lawyer or life insurance professional to clearly understand how these laws pertain to you.

Can a spouse change the beneficiary on a life insurance policy?

Your spouse can’t change your life insurance policy unless they are the policy owner. Although the policy owner is usually the insured, spouses can have insurance on each other.

Is a life insurance policy a marital asset?

Sometimes, a life insurance policy may be considered a marital asset. This is most likely in the case of a permanent life insurance policy that builds cash value.

Because a term life policy typically does not have cash value, it is unlikely to be considered a marital asset.

Can child support be taken from a life insurance beneficiary?

No. If a life insurance beneficiary receives a payout, they have no obligation to give that money to anyone else. To ensure you get the needed support if your ex dies, make sure you are named as the beneficiary through a court order.

Does a divorce decree override a named beneficiary?

Once again, it depends on where you live and your individual circumstances. In some cases, the divorce decree takes precedence over the beneficiary designation. But not always.

State and federal laws can come into play in determining when a divorce decree does and does not trump the beneficiary designation. For example, many states have what is known as an "automatic revocation provision" once the divorce becomes final. In such situations, as soon as you divorce, your ex-spouse automatically becomes ineligible to receive the death benefit.

However, there also can be situations where federal law supersedes state laws. Consulting with an attorney is your best bet for determining which rules apply.

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