Divorce will cause many changes in your life, but one thing never changes – no one lives forever. Life insurance is an essential financial tool to help those you leave behind. Whether you are married or not, life insurance is critical if you have minor children.
Many potential life insurance issues may arise during a divorce. We can help you navigate them so you and your children can avoid legal and financial problems later on.
Your Policy May Be a Marital Asset Subject to Equitable Division
Whole and universal life policies have a cash value, so they are part of your net worth. It must be listed as a marital asset to be divided, and it may be cashed out and divided between you and your spouse. A term life policy does not have a present cash value, so it is not a marital asset and is not subject to division. But it can still come into play because, as part of the divorce order, you may need to maintain life insurance coverage to benefit your children.
Changing the Beneficiary After Your Divorce
Married couples typically name each other as life insurance beneficiaries to cushion the financial blow when one dies. Pennsylvania estate law automatically nullifies the ex-spouse’s beneficiary pre-divorce designation in a private life insurance policy.
Your ex could still be the beneficiary if your settlement agreement or divorce order clearly provides they are to continue. If you and your ex are on good enough terms and you feel your ex is capable, part of an agreement can be that they will care for your minor children after your death.
If that is the case, you could create a trust funded by your policy’s proceeds with your ex as the trustee and your children as the beneficiaries. If your ex is the policy’s beneficiary and you pass away without a trust, they could spend the money on themselves if they wish.
You May Be Legally Obligated to Carry Life Insurance
You may need to maintain life insurance if you will pay child and/or spousal support (or alimony) either as part of the agreement with your spouse or due to the divorce order. If you pass away unexpectedly, the benefits will replace the support you would have paid during your lifetime.
Not everything goes as planned. A spouse required to have life insurance may stop paying premiums without you or the court being aware of the problem. This can be addressed by:
- Providing the insurance carrier with a copy of the divorce decree with instructions that the beneficiary is to be notified if the policy changes or if the premiums go unpaid
- Having the beneficiary own the policy and make payments
- Adding the premium amount to the child and/or spousal support with the beneficiary using this money to pay the premium
Planning on unforeseen, potential problems like missed premiums and addressing them before they happen can be the ounce of prevention that is worth a pound of cure.
If You Have Children and Are Getting Divorced, Life Insurance Makes Sense
Whether your ex is a responsible parent or not, whether life insurance is part of the divorce decree or not, if you have young children, you should consider purchasing life insurance as part of estate planning. You may have created an estate plan with your spouse. If so, it needs to change. If not, you should make one for yourself.
If your ex will be the single parent to your kids with your unexpected passing, fund a trust for them through insurance proceeds with your ex as the trustee. If the other parent is out of the picture or otherwise incapable, through your will you can nominate someone as your kids’ guardian (although a judge has the final say). That person could also be the trustee, and insurance proceeds would help fund your children’s expenses as they grow up.
If you are thinking about getting divorced and all the financial issues (like life insurance) that come with it, contact us at Karen Ann Ulmer, P.C., so we can answer your questions and discuss how we can help you.