Life Insurance and Divorce: What Happens to Your Existing Policies?

Life insurance helps protect your family financially should you die.

It pays a death benefit to your beneficiaries.

Your beneficiaries can use that money to replace your income or pay for other expenses needed to live a normal life.

But what happens to that life insurance when you and your spouse decide to get divorced?

Does the type of life insurance, such as term life insurance or permanent life insurance, make a difference?

Depending on your circumstance, it might.

Life insurance and divorce have several aspects that need to be considered.

This is even more true if you and your soon to be ex-spouse have kids.

Here’s what you should know in general.

Keep in mind, you should consult a divorce lawyer regarding your specific situation.

Do Marital Assets Include Life Insurance?

When you get divorced, you have to split up your marital assets as part of the divorce.

Sometimes this can be done amicably. Other times the court has to get involved.

Life insurance itself isn’t usually a marital asset.

Term life policies

For instance, term life insurance is not an asset at all.

It has no cash value. In fact, it has no inherent value if you’re both still alive.

It only pays out to your beneficiaries if you die during the term of the policy.

Permanent life policies

Some life insurance policies work differently, though.

Permanent life insurance, such as universal life insurance, typically has a cash value component.

You can usually access your cash value at any time to withdraw money.

This may be a marital asset in your state and situation because it has a real value today.

That means the cash value of the policy may be included in your divorce agreement and divorce proceedings when dividing your assets.

What Happens to Existing Life Insurance Policies?

The next question many people wonder about is what happens to existing life insurance policies?

Usually, nothing crazy happens. The policies continue in effect as long as the policy owners pay the premiums.

A life insurance company doesn’t care if you got divorced. They have a contract to continue enforcing.

As long as your divorce settlement doesn’t specify otherwise, the person that owns the policy is the one that decides what happens moving forward.

They may decide to cancel the policy and quit making payments.

This may be the case if the policy owner no longer relies on the insured person for any type of income.

Alternatively, they could decide to keep paying the premiums to eventually receive a death benefit when the insured individual dies.

This is more common when the policy owner receives alimony or child support payments from the insured person.

There is one aspect of a life insurance policy you may want to change after a divorce, though.

You May Want to Change Your Beneficiaries

When most married people take out a life insurance policy, they name their spouse as the beneficiary.

After all, you want your spouse to have the money they need after you die.

When you get divorced, you may no longer want your ex-spouse to get the death benefit payments.

If you have kids, you likely want the kids to benefit from the money. You may or may not trust your ex-spouse to manage that money properly, though.

However, you shouldn’t name your kids as beneficiaries unless they’re the age of majority in your state.

Kids under age 18 in most states can’t receive life insurance money directly. For a couple of states, that age may be 19.

Instead, an adult has to receive the death benefit payment and manage the money for the kids until they become of age.

Set up a trust instead

One way to make sure this is done according to your wishes is by setting up a trust.

A trust lets you spell out exactly when you want the money distributed and how you want it to be used.

You can then name the trust as the beneficiary of the life insurance policy.

You’d name a trustee of the trust. This person would manage the money and make sure it gets used as the trust specifies.

You can have the money be used for the costs to raise your children, pay for college, or any other requirements you desire.

You may not always be able to change the beneficiary of a life insurance policy, though.

If you named your ex-spouse as an irrevocable beneficiary, they have to sign off on the change.

An ex-spouse does not have to approve the change, which means you may be stuck with them as the beneficiary.

That said, some may be willing to sign off on the change in some instances.

Do You Still Need Life Insurance Post-Divorce?

You may wonder if you still need life insurance after a divorce.

This is a very personal question that depends on your situation.

In some cases, you may be under a court order to keep a life insurance policy active.

This could be because you pay your ex-spouse alimony and or child support or have other financial obligations to them.

If you don’t already have life insurance, you may be required to secure insurance coverage.

But what if a court doesn’t require you to keep or take out a policy?

You may or may not need a policy.

The easiest way to determine the need is to consider whether you still have dependents.

If you have no kids and no new significant other, no one may rely on you financially.

In this case, you probably don’t need a life insurance policy anymore. After all, who would you name as the beneficiary?

People with dependents who don’t have the money necessary to allow their dependents to live a normal life after they pass away likely still need life insurance.

Can You Take Out a Life Insurance Policy on Your Ex-Spouse?

You may be wondering if you can take out life insurance on your ex-spouse.

If you rely on them for child support or alimony, you probably feel the need to insure that income in case they pass away.

Without a life insurance payout, the alimony or child support payments would stop when they die.

This could leave you with a significant budget shortfall.

In theory, the court may require your spouse to have a life insurance policy through a court order.

Some divorces work themselves out without going through lawyers and courts to determine every aspect, though.

As long as your ex-spouse consents to the policy, takes the medical exam and signs off on the paperwork, you may be able to get a life insurance policy on them.

You’d be the owner. You’d make the premium payments.

The insured person would be your ex-spouse and you get to choose the beneficiaries as the policy owner.

Of course, your ex-spouse has to pass the underwriting requirements for the policy to go into effect.

How Divorcees Can Work Together to Provide for Their Children

Divorced couples with children should have a shared goal of providing for their children.

Even though the divorced ex-spouses may not get along, making sure the children will live a normal life if either parent passes away is essential.

Having the necessary life insurance coverages to provide money to live a normal life can solve this problem.

This is especially true if a parent makes child support payments or provides a majority of the child care.

Divorced parents can work together to make sure both parents are still insured.

Several life insurance products and services exist depending on your childrens’ specific needs.

If parents trust each other, they can name each other as beneficiaries.

If they don’t, they can set up a trust together or set up two separate trusts to name as life insurance beneficiaries.

Consult the Experts

Life insurance provides for the long-term financial health of a family.

Families going through a divorce have to reassess how life insurance fits in their overall financial plans as they split.

Unfortunately, these situations are extremely situation dependent.

Each state has different laws regarding a divorce that may result in different outcomes.

Each divorce is unique, as well.

You should start by consulting a divorce attorney to learn how things may work regarding your life insurance.

You should take any copies of your life insurance policies with you so they know exactly what they’re dealing with.

Based on how the divorce proceeding goes, you may want to purchase additional life insurance.

To do this, you can consult a life insurance salesperson.

Salespeople work on commissions, though, which means you may not get objective advice.

To help you figure out your new financial life, including the need for life insurance, it may make more sense to consult a fee-only fiduciary financial planner.

These professionals do not accept commissions. You do have to pay them for their time, though.

They can help you build a new financial plan.

They can also help advise you on what type of life insurance is best for your situation or if you even need it at all.