Life insurance policies and beneficiaries probably aren’t top-of-mind when you’re getting married. If you get divorced, however, who stands to benefit if you die unexpectedly can become a thornier question, particularly if there are any children whose welfare needs to be prioritized.
While court decrees can require you to take certain actions, you’re also likely to have a number of choices to make regarding adjustments to your life insurance coverage and beneficiaries. Many people find that their insurance needs change following a divorce. This guide will reveal the key details you need to know.
General rules of thumb and common considerations
Start off by checking your current beneficiary, or beneficiaries if you have multiple policies, especially if it’s been years since you took out the policy.
In fact, it’s a good idea to review your beneficiaries after any major life change, not just a divorce. For instance, if you get married, you might want to change your beneficiary from a parent or sibling to your new spouse.
Typically, a policyholder can change their beneficiary at any time, but divorce can complicate the picture. If the current beneficiary is your ex-spouse, for instance, you’ll likely want to choose someone else to receive the death benefit. If your financial situation is likely to change, you may be considering changing how much coverage you carry.
Whether or not you’ll be able to change the beneficiary to someone new of your choosing, though, depends on the particulars of what, where and who.
State laws
Some states have laws that automatically revoke an ex-spouse’s status as beneficiary. If you lived in one of these states and were to die after a divorce without naming a new beneficiary on the policy, the death benefit payout would most likely go to your estate. Conversely, there are other states that require you to keep your ex-spouse on the policy as a beneficiary (in legalese, this makes your spouse an irrevocable beneficiary).
It is technically possible to change an irrevocable life insurance policy beneficiary, but to do so, you generally need written consent from the beneficiary (the ex-spouse, in this case), which must be notarized and submitted to the insurance carrier. The company might ask for additional documentation to ensure that the benefit forfeiture is lawful.
Domestic relations orders
Domestic relations orders (DROs) are court-ordered requirements that govern how marital property, including financial assets like retirement accounts and stock portfolios, are divided between divorcing spouses.
DROs can pertain to life insurance policies, as well. Irrevocability is a common stipulation, requiring one spouse to keep their ex as their beneficiary. This tends to occur more frequently when the couple shares children or when there’s a significant income disparity between the spouses.
In addition, a DRO may require one spouse to pay the premiums on a policy for their ex-spouse, take out a new policy on themselves or increase their coverage in the event of their own death. This is typically done to make sure that the income from alimony or child support can be replaced if the policyholder dies.
If a policy is surrendered instead
Unlike term life insurance policies, which are generally owned by individuals and do not accrue cash value, permanent life insurance, such as whole life and universal life policies, has an inherent cash value that can grow over time. As a result, permanent life insurance policies are considered marital property to be divided in a divorce.
One spouse might buy out the other’s share of the policy. Or the divorce decree might require that the policy be surrendered and the cash value split between spouses. This move would negate the need to change the beneficiary.
Single parenthood
Divorced parents, particularly single parents not receiving financial support from an ex-spouse, may want to name their children as their life insurance policy beneficiaries. While this impulse is understandable, it might not be the best solution. That’s because minors under the age of 18 can’t legally be beneficiaries, and besides, your insurance company might not allow it.
If your ex-spouse is wholly out of the picture, you need to choose who would be your child’s legal guardian if you were to die. In some cases, it might make sense for the guardian to be named as the beneficiary. Unlike most other assets, life insurance death benefit payouts don’t go through probate, so the guardian won’t have to wait until the estate is settled (which can take months) before receiving financial support.
Another option is opening a custodial account or setting up a trust for your child that can receive the death benefit. Their legal guardian or a trustee you choose would be responsible for the money until your child turns 18. (If you choose a trust, keep in mind that its costs could limit the benefits ultimately available to your child.)
Where to seek help
A little bit of preparation can help you safeguard some of your assets and ensure the best possible outcome for your finances. You will likely have to divide some of your assets during a divorce, particularly if expenses like alimony and child support may be on the table. When it comes to changing your insurance policy’s beneficiaries, it’s best to approach the process after getting guidance and assistance from the following professionals.
Get help from an insurance representative
Even in this age of online quote generators and comparison sites, the wisdom of an experienced life insurance agent or company representative can be invaluable as you navigate the additional complexities divorce can bring to your financial- and estate-planning.
An experienced rep can aid you in finding affordable coverage if your financial obligations have risen after a divorce or help you determine if you might be better served by a different type of policy. For instance, if you surrendered a permanent life insurance policy to split the cash value with your ex-spouse, yet still need life insurance until your children are adults, a term life insurance policy might give you sufficient coverage.
Consult with an attorney
Having a knowledgeable attorney negotiating on your behalf during a divorce can save you a lot of time and ensure that you are on the right side of the law. They’ll field your questions about your marital assets, alimony, child care and other parts of the divorce proceedings and ensure your financial interests are protected. Such an advocate can also provide guidance when it comes to your life insurance beneficiary designations.
Book time with a financial planner
If you don’t already have one, consider engaging a financial planning professional to walk you through managing your money after a divorce and to help you rebuild your wealth.
Certified financial planners (CFPs) specialize in creating comprehensive financial plans, often for a flat fee, although some will charge by the hour for one-time consultations. These professionals can offer you valuable insight on how your insurance needs may change after a divorce, and help you assess those needs within the broader context of your long-term financial plans. Among the options they can explore include whether you should consider taking out a new life insurance policy as a single person and, if so, which policy type and company might provide the best life insurance choice for you.
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