When a couple gets divorced, there are many financial details that need to be accounted for and settled. Life insurance is just one of them.
Life insurance is often a necessary part of court-ordered alimony and child support. It can also help to provide a safety net for spouses who have custody of their children.
Beneficiary Designation
The beneficiary designation of an insurance policy, retirement account or other financial asset is one of the most important documents you need to review and update when you divorce. If you die without changing the designated beneficiaries on these accounts, your assets may be distributed to your ex-spouse, or to your estate, depending on the laws in your state and the insurance contract.
Beneficiary designations are used in a variety of financial accounts, including life insurance policies, bank checking/savings accounts, 401(k) plans and individual retirement accounts (IRAs). In order to transfer these accounts on death, you must complete a form listing the beneficiary who will receive the assets upon your passing.
Choosing a beneficiary is a personal decision, and you should be very specific when naming someone as your beneficiary. You might want to choose a spouse, child, or parent, but you should also consider who will need the money at your death.
You can also name a contingent beneficiary in case your primary beneficiary predeceases you. The contingent beneficiary is the next person in line to receive the funds.
In many cases, a spouse is the preferred choice as the beneficiary. However, some people prefer to leave their children as the beneficiaries.
Once you have a designated beneficiary, the benefits of your insurance or retirement plan will be paid to them according to the terms of your agreement. These payments will generally be made in the order referred to as “standard sequence” under Wisconsin law.
This is important because it ensures that the assets will be distributed to the intended recipients. The standard sequence can vary from state to state, but it is usually the same in most states.
It is important to keep the beneficiary designation up to date because named beneficiaries often override instructions in a will. You can do this by reviewing your life insurance and retirement benefit beneficiary designations periodically.
Fortunately, the process of changing your beneficiary designation is generally quite simple and easy to do. You simply need to contact the account custodian and fill out a Change of Beneficiary Designation form. The custodian will then verify the change is recorded and your funds are distributed accordingly. The custodian will usually provide you with a confirmation letter that confirms your changes.
Term Life Insurance
Term life insurance is designed to provide coverage for a specific period of time. This type of insurance typically charges a fixed premium every month and pays out a death benefit upon the insured’s passing. It’s a popular choice for young families, as it only provides temporary coverage and can be more affordable than a permanent life insurance policy.
If you are looking for long-term protection, consider a whole life policy instead of a term life policy. These policies have a cash value that can grow tax-free and are generally more expensive, but they can help you build a nest egg that will last for years to come.
In addition, a whole life policy is not subject to the same state laws that apply to other types of policies. However, if you are concerned about the possibility of a divorce, it’s important to consult with an attorney before naming a beneficiary for your life insurance policy.
A life insurance policy can be a valuable asset during divorce proceedings, especially in states that follow the community property doctrine. A term life policy that is purchased with community funds and paid for with community earnings can be considered a part of a spouse’s marital estate.
This is because in California, as in many other states, anything that was acquired during the course of a marriage is considered community property and therefore liable to be divided in the event of a divorce. It is also important to understand that, in California, the proceeds of a term life insurance policy remain community property after the spouse paying the premiums passes away.
Despite this, it is often best to make sure that the ex-spouse receiving support is the owner of the life insurance policy and is responsible for maintaining the payments and ensuring that the named beneficiaries receive the death benefits. If the ex-spouse stops making payments or allows the policy to lapse, it can be difficult to recover from this loss.
The ex-spouse receiving the support should make it a point to pay all of the premiums on the term life policy and keep the policy active, says Mitch Gordon, an attorney at Bradford & Gordon in Los Angeles. He suggests using third-party authorizations on the policy so that you can be notified if your ex-spouse stops paying the premiums or if the policy is about to lapse.
Permanent Life Insurance
Permanent life insurance is designed to last a lifetime and offers tax-deferred cash value that can be withdrawn during your lifetime. It also includes a death benefit that pays out upon your death. The policy can be a great way to secure your family’s financial future, especially when you’re planning for retirement.
The premiums of a permanent policy are usually higher than those of a term policy, but the coverage can help protect your loved ones and meet your long-term goals. You can choose from whole life, universal life or variable life insurance policies to meet your needs.
A permanent life policy can be especially important in a divorce situation, where spousal and child support payments may change or end. The death benefit on a permanent policy can provide the money necessary to pay for your children’s education, as well as cover final expenses.
Because the death benefit of a permanent life insurance policy is guaranteed, your beneficiaries will receive a payout that’s always there when they need it most. In most cases, the death benefit is also tax-free.
If you’re a stay-at-home parent or the sole caregiver of your kids, a life insurance policy can be especially important to ensure they’ll be taken care of when you’re gone. It can also be a valuable asset in your will if you want to leave an inheritance for your children.
Investing in a permanent life insurance policy while you’re young is a smart move. It’s cheaper than a term policy while you’re younger and can offer significant savings over time.
In addition, the death benefit of a permanent life policy grows over time. This growth can be used to pay for expenses such as your funeral costs, or you can use it to help supplement retirement income.
If you’re facing a divorce, it’s wise to talk to a financial advisor about your permanent life insurance options. He or she can advise you on how to structure your policy for the best possible benefits and minimize any issues that could arise after your divorce.
Changing Beneficiaries After Divorce
Married couples often purchase life insurance policies together to help them pay for the future needs of a family. In most cases, the spouse is named as the primary beneficiary on the policy.
If you divorce, it is important to change the beneficiaries on all financial assets, including life insurance policies, retirement accounts, health savings accounts, and brokerage accounts. Failing to do so can have serious consequences.
In some states, life insurance companies will automatically revoke the ex-spouse’s designation as a beneficiary after divorce, so it is important to review the status of your policies as soon as possible.
Changing the beneficiary of an insurance policy is generally as simple as sending in a request for change and providing proof that you are the owner of the policy. The only exception is if you have an irrevocable insurance policy, such as a term life or permanent life policy, which requires the consent of the other party to change the beneficiary.
A person may also wish to make changes to other estate planning documents, such as a health care power of attorney or living will. These documents usually name someone to make medical treatment decisions on your behalf if you become unable to do so.
It is best to consult with a family law attorney before making any changes in these documents. They can advise you on whether these changes should be made while the case is pending or after you have filed for divorce.
Another important consideration is if the person who makes the changes is the person designated as the beneficiary. If it is the former spouse, they are still legally obligated to honor the terms of the life insurance policy.
Keeping the former spouse as the beneficiary of a policy is sometimes useful for spousal support and alimony payments, which will be payable upon death of the ex-spouse. In this case, the former spouse may be able to claim a portion of the benefits, depending on how much is due and whether the amount is enough to cover all the payments.
