How Do I Manage My Life Insurance During Divorce?
When it comes to divorce, life insurance is one issue that tends to get overlooked. That is surprising because it is a vital source of financial support should a parent suffer an untimely death. However, it can be daunting figuring how much to provide and who the money goes to. When the policy holder gets divorced, these details become even more complicated.
Life insurance provides child support and/or alimony for a surviving spouse and children should an individual pass away. Upon the person’s death, life insurance pays out a death benefit to the insured person’s beneficiaries. Some life insurance policies also have a cash value that can be drawn up, much like a bank account. Like child support, life insurance covers the costs of raising a child and all the expenses that come with it, such as the following:
- Medical expenses
- Sports and other activities
Life insurance ensures that minor dependents of a deceased parent will have all their financial needs met until they turn 18 or graduate from college.
Will Alimony be Affected?
When a spouse is ordered to pay support to their ex-spouse in a divorce, that amount must be secured even if they should pass away. Life insurance is a way to secure this money. Although there are always exceptions, alimony is generally paid out for the amount of time equivalent to the length of the marriage; this is called durational alimony. To make sure the life insurance policy holder always pays a fair and reasonable amount of alimony, it can be adjusted should an ex-spouse experience a drastic reduction in income, such as the loss of a job or retirement. If alimony payments are reduced, life insurance will be reduced accordingly as well.
Because every person’s circumstances are unique, there is no one-size-fits-all system for determining how much life insurance to carry. Requirements can also change as employment, income, and marital status change. An experienced divorce lawyer is a good resource to make life insurance recommendations based on a person’s particular situation at the time.
What are the Different Types of Life Insurance Policies?
During divorce, many people revisit their current life insurance policy to accommodate for child support and alimony. There are a host of different types of life insurance policies to consider, but they typically fall into two categories:
Term life insurance: Term life insurance is the most straightforward type of policy. Policy holders typically make a monthly payment for term life insurance, which makes it one of the more affordable plans available. Upon a person’s death, term life insurance pays out a fixed sum of money to the beneficiaries. However, it pays out only if the person should die during the term of the policy.
Typically, the terms are either 10, 20, or 30 years. For example, if a person purchases a 30-year term life insurance policy for $500,000 in coverage, the insurance company gives their beneficiary a check for $500,000, provided they are current on their payments should they pass away during that 30-year timeframe. If they die a year after the term expires, their beneficiaries receive nothing.
Permanent life insurance: Permanent life insurance is a bit more complex than term life insurance because it serves an additional function. Besides paying beneficiaries after a parent’s passing, it also includes a feature similar to a built-in savings account. This is called a cash value, and it can be accessed or borrowed against like money in the bank. Also, unlike term insurance policies, permanent life insurance does not expire unless the holder stops making payments or dies.
What Steps Should I Take Regarding Life Insurance During Divorce?
Life insurance is considered essential for any divorced person who has children or pays child support or alimony. The following are basic steps for managing a life insurance policy when the marriage ends:
Calculate how much life insurance coverage is necessary. The first step to calculating life insurance coverage for minor children is estimating how much money it will take to raise the child. Parents must factor in the costs of education, medical care, and extracurricular activities. If the child wants to attend college, those costs have to be assessed as well.
For alimony, the amount is easier to calculate. Because spousal support is a specific amount paid out for a set period, the math is more straightforward. It is important to remember that the payee, the surviving spouse, will pay taxes on that alimony, so the amount of coverage should reflect the total alimony after taxes.
Decide the duration of coverage. Parents must figure out how long the child will need child support. That is going to differ by family. For example, a toddler is going to need much more life insurance than a teenager who is in the latter part of their high school years. The duration of life insurance correlates to the duration of court-ordered child support. When it comes to alimony, the total is easier to calculate. In most divorce cases, spousal support is paid to an ex-spouse for the same length of time as the marriage lasted.
Re-designate a life insurance beneficiary. Naming a life insurance beneficiary is a critical decision during divorce, especially because that person often changes when the marriage ends. For most married couples or couples in civil unions, a spouse is the logical beneficiary. Life insurance allows them to continue paying the mortgage and other household expenses after they lose the deceased spouse’s income.
However, after divorce, that changes. If no children are involved, removing an ex-spouse as a beneficiary is a given. However, this is possible only if the life insurance policy is revocable or changeable. In that case, a call to the insurance agent will confirm the change to re-designate the beneficiary.
Make provisions for the children. Although it may seem logical to name children as beneficiaries, it is not always practical, especially if they are minors. In that case, the policy holder has to make provisions to be sure the children receive the financial support set aside for them. Many states prohibit an ex-spouse from receiving life insurance proceeds unless the insured spouse takes specific steps to re-designate them as a beneficiary. This works when co-parents have a good relationship built on trust.
An insured spouse who has reservations about how their ex-spouse would use life insurance funds after their passing can establish a trust to handle the proceeds in a way that protects and provides for the children. A divorce lawyer can assist with this process.
Consider the cash value when accounting for marital assets. As discussed above, certain life insurance policies accumulate a cash value over time. A portion of every monthly premium payment goes into a fund that gradually draws interest. The cash value of the policy is the balance of this fund. This is the insured person’s money and is included in their overall net worth. Like all other marital assets, the cash value of the policy is divided upon divorce.
Adjust life insurance with major life changes. As the current pandemic has shown, life can change suddenly. Losing a job, experiencing a serious health problem, or getting remarried all impact a person’s overall financial situation. Life insurance should reflect these significant life events. Although child support often remains unchanged, alimony is generally affected by the paying spouse’s circumstances.
In many cases, life insurance designated for alimony can be reduced or terminated if the paying spouse’s income drops substantially. Also, if the payee, the spouse receiving alimony, remarries or even cohabitates with a significant other, they may lose alimony as well.
Consult with a trusted divorce lawyer. The time to manage life insurance is during the divorce process, not after. Because there are so many details that need to be considered to cover child support and alimony, it makes sense to consult with a divorce lawyer before making any policy revisions. If life changes at any point in the future, a lawyer is available, along with the insurance agent, to revise the terms of the policy.
No one wants to think about passing away before seeing their children grow up, but investing in a life insurance policy that offers children financial security is one of the greatest gifts a parent can give. Purchasing life insurance and naming a beneficiary during divorce are important matters that should not be undertaken without the assistance of a knowledgeable professional.
Morristown Divorce Lawyers at Lyons & Associates, P.C. Help Clients with Financial Decisions in a Divorce
The Morristown divorce lawyers at Lyons & Associates, P.C. understand that managing life insurance and making changes when divorcing can feel overwhelming. That is why we take the time to explain all the details you need to consider so you can make informed decisions during a divorce. Call us at 908-575-9777 or contact us online to schedule an initial consultation today. Located in Somerville and Morristown, New Jersey, we proudly serve clients in Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, and Morris Plains.