When two people are married they will commonly carry a life insurance policy to ensure that a surviving spouse is able to cope financially in the event of the other spouse’s death. This article will explain why life insurance in favor of your former spouse and your children is important, even after a divorce.
Whole Life Versus Term Life
When considering how to use life insurance in your divorce, the first consideration is whether you want a whole life or a term life policy.
Generally speaking, term life (also called “temporary life”) policies are cheaper at the start, making them a good option when money is tight. They’re intended to provide a set payout after the expiration of a period of time—usually the life of the policyholder. Rates increase as time passes, and they may be quite expensive as the policyholder’s health declines or the policyholder approaches the anticipated age of death. They can last up to 30 years, but are most commonly purchased for 20 years.
By contrast, whole life policies also offer lifelong coverage, but they include an investment aspect whereby a policy’s cash value grows at a guaranteed rate and isn’t subject to taxation while the value increases. The policyholder can borrow against the policy’s cash value, but if the loan isn’t repaid with interest, the death benefit will be reduced. If the policy is dropped, coverage completely disappears.
Term life insurance has no surrender or cash value, so it isn’t divided in a divorce settlement. But whole life policies do have surrender and cash value, so if you’re still married and you have a whole life policy, expect that the court will order it to be divided in the final divorce order.
Everyone going through a divorce should examine the benefits and drawbacks of each form of insurance before deciding on the best policy for their own unique, post-divorce financial situation.
How Life Insurance Works After Divorce: Alimony and Child Support
If you must pay alimony to your ex-spouse, or if you have a child support obligation, it’s a good idea to purchase a sound life insurance policy which will cover your obligation in the event of your death.You can purchase life insurance for varying lengths of time. For example, if your child support obligation will disappear when your child turns 18 in five years, a five-year life insurance policy should guarantee your child’s financial stability. Do note that most insurance companies won’t pay benefits directly to a minor, so you’ll need to establish a method to assure that payments go to your intended beneficiaries, most commonly by electing the child's other parent as the executor of your child's benefits.
Similar to child support, if you’ve been ordered to pay long-term or even permanent alimony, life insurance is a crucial consideration. If you die prematurely, you’ll leave behind a significant, ongoing obligation and your ex-spouse will be left holding the bag.
If you have long-term alimony or child support obligations, don’t be surprised if the judge presiding over your divorce orders you to obtain a life insurance policy sufficient to cover the debts you’ll leave behind if you die prematurely. Courts in most states have the power to issue such orders, which safeguard the needs of ex-spouses and children and prevent them from falling into poverty. Likewise, if you’re entitled to long-term or permanent alimony, or long-term child support, work closely with your lawyer to make sure that you negotiate a life insurance requirement into your divorce settlement or decree.
If you’re the primary caretaker of your children and you didn’t get child support or alimony in your divorce, it’s still a good idea to take out a life insurance policy on yourself and name your children as the beneficiaries, along with an appropriate executor who can manage the children's insurance payments. That way, you can make sure your children will have sufficient financial support in the event of your death.
Finally, if you or your children are the beneficiaries of your ex-spouse’s life insurance policy, you should monitor the policy at least annually to ensure that it’s still in effect for the full amount ordered in the divorce. If the payout amount has decreased, or your ex has dropped the policy, you’ll need to take your ex-spouse back to court, and ask a judge to enforce the original order.
If you have questions about life insurance and divorce, contact an experienced family law attorney as soon as possible.