How Life Insurance Works During Divorce, find out – Divorce can sometimes be overwhelming, even the friendliest divorce can leave you thinking about finances, determining how to share properties, and if there are children, they must make custody arrangements.
Life Insurance can assist you with your assets, which you’ve worked to build, and becomes even more important after a divorce. See the following subheading, and find out how to handle an existing life insurance in a divorce.
How to Handle Existing Life Insurance in a Divorce
Two married couples often purchase life insurance to cover existing or anticipated debts or other financial responsibilities. Especially once a couple decides to go their separate ways, these obligations can remain.
To make sure that life insurance can be accounted for, you need to provide documentation of all your current assets, liabilities, and insurance policies.
For instance, New Jersey needs each spouse to offer an affidavit of insurance coverage at the start of a contested divorce case.
This document outlines all the policies you and your spouse put in place when you filed for divorce, including policies that have been canceled within the past 90 days.
How you handle life insurance requirements will decide your current and future life insurance needs including the affordability of keeping the policies.
Once you have a cash-value life insurance policy, you and your spouse can decide to terminate the policy and then share the cash value equally.
Other recommendations may include surrender charges, and this will decrease the surrender value of a policy. There are related questions you would mind asking your attorney concerning how to handle life insurance, see the following paragraph and find out.
Questions to Ask Your Attorney About Handling Life Insurance
When discussing with your attorney, take note of the fundamentals of why you purchased life insurance initially. Now your attorney should assist you in determining the future purpose of your existence and new policies in the context of your divorce.
Some of the questions you might want to ask your attorney include:
- What insurance obligations will I have after my divorce?
- What should happen to my life insurance policies after my divorce?
- How do I verify my ex-spouse is insured?
- How do we know if we are insurable?
- How do we calculate the appropriate amount of life insurance?
Since life insurance is normally part of a broader financial or estate plan, it’s pleasing & wise to consult with a financial planner who can assist you, and help you access the existence of life insurance and the amount of coverage you may need.
Chris Chen, CFP, of Insight Financial Strategist in Massachusetts, mentions that:
Divorce offers individuals the opportunity to determine how they want to live separately and also of how they want to live separately, and how they are to care for their children they had together.
Major Life Insurance Problems
Here are a few of the most common life insurance problems that come up during and after a divorce.
1. Change Was Made to a Life Insurance Policy
Sometimes the policy owner will make changes to the policy without informing the beneficiary about it.
For instance, if an ex-spouse eventually provides support, and owns a life insurance policy, they can easily change the beneficiary without notifying the other ex-spouse.
Or a policyholder can decide to stop paying the premiums or even allow the policy to collapse. This alone could terminate the policy, leaving the ex-spouse without any financial safety block in store.
On the other hand, there are other ways to avoid these problems. Firstly, there’s an option for the spouse receiving support to own the life insurance policy.
This allows you to have full control over the payments and the naming of the beneficiaries. Another alternate option is to have third-party authorizations within the account in order to obtain information if changes are made or if the policy is about to elapse.
By having third-party authorizations on the account, you can gain information once changes are made to the life insurance, which may include beneficiary changes, coming from the insurance company.
In this way, the ex-spouse who’s getting child support can make sure the policy is active and is protecting the support payments.
2. Reallocation of Support
Financial circumstances can change for both parties after divorce. You need a reallocation of support if the payor loses his job or the recipient of alimony begins to make 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
3. Insurance Obligations
Life insurance needs can also change with time. For instance, if a payor is responsible for paying $100,000 in alimony over 10 years, the payor will only need a 10-year $100,000 life insurance policy.
Meanwhile, if the payor 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 arrangement can permit the payor to step down insurance over time as support is paid. The payor could regulate the life insurance death benefit in a way that the coverage can be reduced or even add a new beneficiary to receive 50%.
It’s important to note that the insurance company will not automatically do this because it’s up to the policyholder to make these changes.
The Right Types of Life Insurance After a Divorce
The right type of insurance will depend on what you already have. 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.
Take your time to access all your options and your long-term financial plans – this will help you find out the best way to protect assets after going each other’s separate ways.