What to Know About Life Insurance and Divorce
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Getting divorced often means emotional turmoil and a mountain of financial issues, including splitting up assets, paying attorney fees and hammering out child support and alimony obligations. So if you’re going through a divorce, life insurance might not be top of mind.
But making sure you have the right coverage is a smart financial move. You’ll want to update any existing policies to reflect your new circumstances, and potentially even buy a new policy to cover financial obligations required by your divorce agreement. Here’s what you need to know about life insurance and divorce.
What to do with existing life insurance
If you already have life insurance, here are a few things to consider during the divorce process.
Beneficiaries
A life insurance beneficiary is the person who gets the death benefit if you die while the policy is active. If your spouse was previously listed as a beneficiary, you’ll likely want to change that after your divorce — except in certain circumstances.
For example, if it’s an amicable separation and there are minor children involved, you might want your ex to get the benefit to help take care of the children after you die.
Note that in some states, an ex-spouse may be automatically removed as a life insurance beneficiary after a divorce. This is known as “revocation upon divorce.” If you want to keep your ex on your policy, speak with an attorney about your options.
You might be tempted to list your children as beneficiaries. However, insurers typically won’t pay life insurance benefits directly to minors, so naming one in your policy can result in delays and paperwork. Instead, name a trust as the beneficiary on behalf of your children and designate a trustee to distribute funds according to your wishes. An estate planning attorney can help you set up a trust.
If there are no children involved, you can choose any new beneficiary you’d like, such as a relative, friend, charitable organization or your estate.
If you or your spouse has already filed for divorce, consult your attorney before updating your beneficiaries. In some states, it’s illegal to change beneficiaries until the divorce has been finalized.
Cash value
If you or your spouse has permanent life insurance, the cash value of the policy may be considered a marital asset and therefore subject to your divorce settlement agreement. In some cases you may want to cancel the policy and split the cash surrender value, though fees and taxes may apply.
There may also be other possibilities. For example, one spouse could keep the policy and offer different assets to the other spouse to make up for the lost cash value. Reach out to your insurance agent or carrier to explore your options.
Joint life insurance policies
Some people have joint life insurance — a policy that covers two people. If you and your spouse share a policy, check whether it includes a rider enabling you to split it into two individual policies in the event of divorce. If not, consult your life insurance agent or lawyer.
New life insurance after a divorce
A divorce may mean big changes for your financial circumstances, along with an increased need for life insurance. If you don’t have coverage already — or if what you have isn’t enough anymore — here are a few things to consider.
Alimony and child support
Divorce can result in ongoing financial commitments to your former spouse. For example, divorce settlements often require one parent to pay the other child support. Alimony payments from one spouse to the other are sometimes required regardless of whether children are involved.
Some of these obligations may end if the person making the payments dies. Because of this, “judges can rule that a term policy be purchased to provide security for child support or alimony payments,” says Mia Frabotta, a family law attorney at McCarter & English LLP in Boston.
Life insurance terms can be shorter than five years or longer than 30 — long enough to last until a mortgage is paid off and kids are finished with college. Once the term ends, the policy will expire and you’ll no longer have to pay premiums.
“You can customize life insurance obligations to coincide with the end of your support payments,” Frabotta says. “It’s a good way to make sure the policy is only intact for the obligated amount of time.”
» MORE: Compare life insurance quotes
Addressing the loss of a primary caregiver
It might be a good idea to buy life insurance after a divorce even if you don’t pay child support or alimony — especially if you’re a primary caregiver. Imagine if you died before your children reached adulthood. Your ex-spouse might need extra money to pay for their care.
What if your ex-spouse won’t be helping with future child care? If you’re now effectively a single parent after your divorce, having life insurance is even more important. You’ll want to choose a potential guardian for your children and leave enough money for their care.
One solution might be a term life insurance policy that covers you until the youngest child reaches adulthood, with the guardian as the beneficiary. Another option might be to create a trust for your children and make it the beneficiary of your life insurance policy. You’d then name a trustee to ensure your life insurance payout and other assets are distributed according to your wishes after you die.
For help making these decisions, consider reaching out to a lawyer with experience in estate planning.
College costs and mortgages
You might have started saving for your children’s college expenses during your marriage. Divorce settlements commonly dictate that you and your ex-spouse continue to share this responsibility once you split up. So what happens if either of you dies? Having life insurance can ensure that these costs are covered.
You might also consider buying life insurance if you’re still living in the marital home with your children. This way, if you die, your ex or another guardian of your choosing can pay off the mortgage and keep the house. Again, an estate planning lawyer can help you make sure your wishes are followed after your death.
Beneficiaries
When you own a life insurance policy, you can name and change beneficiaries. This can lead to mistrust in divorced couples. To get around this, divorce agreements can require that ex-spouses be allowed to make sure policies are paid up and the correct beneficiaries are named.
Another option: You can own a policy on your ex and name yourself the beneficiary. This way, you’ll be responsible for paying the premiums and naming the beneficiary. However, you can’t do this without your former spouse’s cooperation.
How much insurance to get after a divorce
If you don’t owe alimony to your former spouse, you don’t have children and there’s no one depending on your income, you may not need life insurance at all after a divorce.
But if your divorce has left you with financial obligations — such as child support to pay or a mortgage you’re now fully responsible for — life insurance is probably a good idea.
Your divorce settlement may specify the amount of court-ordered life insurance you’re required to buy and how long you have to keep it. Otherwise, you can choose your own coverage limit.
To decide how much life insurance to buy, consider who’s depending on you and for how long. Ask questions like:
What’s my mortgage balance, and how many years are left?
How much alimony and/or child support am I required to pay?
How much will my children’s college education cost?
If I passed away, how much would it cost to replace my income (or to pay for child care)?
Add these figures up to get a sense of your financial obligations. Then consider how much money you have in savings and other assets to meet those obligations. Subtract your savings from your obligations, and buy at least enough life insurance to cover the gap.
For more in-depth help, use our life insurance calculator to help you find out how much life insurance you need.
More Nerdy advice
To learn more about the divorce process, see the following guides:
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