But a life insurance policy can become an important stopping point during the divorce settlement. Couples find themselves squabbling over these policies, and for good reason. A judge can order changes to the ownership of life insurance policies.
Today, we will explore everything you need to know about life insurance policies and divorce cases. Consider this your unbiased guide to:
Why do divorced people argue about life insurance?
Everyone has heard tales of difficult divorces, and possibly going through. But even if your divorce is amicable, both parties may quarrel over a life insurance policy.
There are two reasons even friendly couples argue about life insurance during a divorce: benefits and responsibilities.
Life insurance benefits
Life insurance policies provide us with peace of mind by feeling financially secure. An entire life insurance policy can have significant cash value. It can also be sold to life settlement broker Or spend it for a lump sum so it can be an important financial asset.
Term life insurance policies do not build a monetary value, but they still have value to the beneficiary.
Most life insurance policies require you to pay a monthly, quarterly, or annual premium. Therefore, divorced people may quarrel about the financial responsibility of the premium payments. This is important, because paying the missed premium on a term policy may cause the policy to lapse or be cancelled.
When a premium is missed on an entire life insurance policy, the insurance company will usually take that amount out of the cash value. More missed payments result in lower cash value. The value of this asset becomes slightly lower.
If the entire life policy does not have a significant cash value yet (it takes several years to form a meaningful amount), the policy can be canceled when your missed payments are greater than your total cash value. The entire investment plan failed and became a loss.
Is a life insurance policy considered a marital asset during a divorce?
Marital assets are usually joint property. A life insurance contract, on its own, is not an asset in a divorce because you do not have access to death compensation at this time.
States have different laws regarding “fair distribution,” or “community property,” in marriage. If you live in a condominium, the assets attached to an entire life insurance policy (the cash value) may need to be divided equally between the spouses, unless some other arrangement can be made.
Before we introduce some specific situations that you may encounter during a divorce, let’s remember who is in politics.
Who’s on a life insurance policy?
A life insurance policy is a contract, and there are a few key players involved:
- The insured He is the one who insures his life.
- beneficiary The person or organization that will collect death benefits upon the death of the insured. There can be more than one beneficiary in a policy.
- The policy holder oversees the policy. The policy owner does not need to be a beneficiary or insured but is responsible for paying insurance premiums. This person can make changes to the policy regarding the names of beneficiaries and the percentage of death benefits received by multiple beneficiaries.
- believer It is a life insurance company.
Now let’s explore some of the situations that can arise during a divorce and possible solutions.
Life Insurance and Divorce: Possible Cases and Remedies
Life insurance can be complicated, so we’ll use a few scenarios to illustrate common issues.
Example 1: Tom and Trisha have a $150,000 fixed-term policy
Tom and Trisha are a young couple in their early twenties with a young child, Junior. Tom is the owner of the term life policy; He is also a believer. Trisha is currently the only beneficiary, and in the event of Tom’s death, she will receive her entire death compensation of $150,000.
This policy is good for the next 20 years, and Tom pays $20 a month for coverage.
Trisha wants Tom to keep paying for the policy, and she wants you to remain the beneficiary. However, Tom does not like this idea at all. They have a few options.
First, Tom could make his son the benefactor. But since Junior is young, a reasonable adult or attorney should be included in the policy as well. Insurance companies will not give $150,000 to a minor if Tom dies. Therefore, he can add Trisha to the policy to collect benefits on behalf of his son. If Tom doesn’t trust Trisha, he can assign a lawyer to the policy to handle it, or someone else he trusts, such as the child’s grandparents.
But Tom may not want to keep paying for his life insurance policy at all. It looks at the potential potential costs of child support and alimony. In this case, he can make Trisha the owner of the policy. You will be responsible for paying insurance premiums to maintain the policy.
Finally, Tom can use this insurance policy as a negotiation tool for another part of the divorce. He might agree to keep paying $20 per month for the document, but on the condition that his alimony payments are reduced by $20.
Ultimately, the decision will usually be made in mediation Part of the divorce procedure. The court-appointed mediator then sits down with the couple and finalizes these options. If policy changes are needed, it is important that Tom follows the final verdict to the letter.
Example 2: Stan and Sarah have a full lifetime policy of $20,000 and $1,000
Stan and Sarah are a middle-aged couple with no children. Sarah is the owner and benefactor of the Whole Life Policy. Stan is insured.
Sarah bought this policy to insure Stan, and she paid the premiums for five years. She argues in court that the whole policy follows her, and depending on her state, the judge may agree.
In this case, Stan and Sarah agree to leave the policy as it is. Sarah will continue to pay the premium and will remain the beneficiary. When the time comes, Sarah will receive death compensation. Or she can take advantage of the policy later when she’s ready to retire. It can also sell the policy to a settlement broker for life; Stan has no say in this matter.
In some states, Stan might argue that the cash value of a life insurance policy is an asset. If the judge agrees, he may order Sarah to pay Stan half of Stan’s current cash value, or $500. If Sarah can do this and keep the policy, she will end up making more money later.
Example 3: The Brown family has a combination of life and minors insurance policies
Now let’s imagine Jodi and Thomas Brown. They are a family with a high net worth, with four adult children and a variety of life insurance policies. They each have several long-term policies, each have a full-life policy, there is a diminishing terms policy on Thomas’ mortgage payment that is paid through the mortgage payment each month, and they both have annuity and accidental death policies.
It’s complicated, but not impossible.
Assuming this divorce is fairly amicable, the best thing Thomas and Judy can do is sit down and have a frank discussion about their policies and goals. They would probably agree that the purpose of life insurance is to create immediate property for their children and to name them as beneficiaries on each policy. This would be the easiest solution. Thomas and Judy would call every life insurance company they worked with and give each child 25% of all death benefits.
The only hiccup in this case would be the diminishing term policy aimed at paying the $4 million mortgage in the event of Thomas’ death. In that case, it would be best to leave this policy alone for the time being. The home may need to be sold soon once the assets are divided, so it may become a moot point.
Unfortunately, not every divorce is amicable. If Judy and Thomas can only communicate through their attorney, they should be clear about what life insurance policies are in place. Their lawyers can struggle over the details of the policy if Brown cannot reach an agreement.
Example 4: Life insurance issues when divorcing the disappeared spouse
This seems like an odd situation, but it isn’t. In any given year in the United States, there can be 500,000 to 100,000 adults missing. Some people seek divorce in this situation, and laws vary from state to state about the time frame and asset allocation. Usually, after a year without contact, you can divorce the missing spouse.
If this is your situation, your best solution is to continue paying for any life insurance policy you have that identifies your spouse as insured, and you are the beneficiary. Statistically speaking, only about 4,000 deaths in the United States remain unidentified each year. If your missing husband dies, he is very likely They will be recognized.
If you have a lifetime policy, you can also choose to pay with cash on the policy.
Remember, if your missing husband is her From the insurance policy, they can change the beneficiary listed on the policy at any time, or cash it, which is out of your control. Do not allow these premium payments to continue out of your (previously subscribed) checking account. So, act on this when you feel comfortable and close that old bank account.
Now that we’ve explained how life insurance works during a divorce, let’s talk about how annuities work in the event of a divorce.
How do pensions work in divorce?
Many people think of premiums as investments, like the stock market or government bonds. But annuities are life insurance products, sold by licensed life insurance agents, not so Licensed stockbrokers. So we’ll cover them here.
An annuity is a type of investment usually made for the purpose of retirement savings. In addition to lifetime income after retirement, or income for a predetermined number of months, annuities almost always include death compensation for the surviving spouse. The most common disposition of pensions during a divorce is a simple 50-50 split. You will need to work with the insurance company first to see if this is possible.
For example, imagine Thomas and Judy, our wealthy family from the above story. They invested in an annual salary of $50,000. The simplest option is to divide this amount into two annual salaries, so that each spouse receives a new annual pension of $25,000.
There can be complex losses Associated with this division if the premiums are large. Therefore, if you have an annual salary of over $50,000, we recommend speaking with your insurance agent and financial advisor and look forward to determining the best course of action. Dividing it may not be the best decision for either party.
Up to this point, we’ve covered what happens to current life insurance policies during a divorce. Now, let’s think about the future.
The divorce is final. Can my ex buy new life insurance?
Yes, but only if you allow it. Your ex-partner may have a significant financial stake in your health. You may pay child support or alimony. Or maybe they are counting on you to finish raising the kids. If they have a financial interest in your life, they can legally secure your life.
But they can’t do that without your permission. And in most cases, you will need to either complete a quick medical exam, or fill out and sign some paperwork related to your health, before your life insurance policy can take effect. In short, your ex will not be able to secure you without your knowledge, one way or another.