Divorce can be devastating. Even an amicable divorce can cause financial hardship when you consider the cost of establishing and maintaining two individual households. While there are a lot of moving parts during and after a divorce, life insurance tends to be an afterthought.
If you’re going through a divorce, life insurance can help protect the assets you’ve worked to build. While every divorce will have a different set of financial challenges, life insurance can be a crucial component of a divorce settlement.
How to Handle Existing Life Insurance in a Divorce
Married couples often purchase life insurance to cover existing or anticipated debts or other financial responsibilities. Even when a couple decides to go their separate ways, these obligations may remain. That’s why existing life insurance considerations can be an important component of a divorce.
To ensure all life insurance has been accounted for, you may need to provide documentation of all your current assets, liabilities, and insurance policies, pending a divorce complaint. For example, New Jersey requires each spouse to provide an Affidavit of Insurance Coverage at the beginning of a contested divorce case. This document outlines all policies you and your spouse had in place at the time you filed for divorce, as well as policies that have been canceled within the past 90 days.
Taking an inventory of all current insurance policies will help divorce proceedings.
How you handle life insurance requirements will be determined by your current and future life insurance needs as well as the affordability of keeping the policies. For example, let’s say you and your spouse each have a term life insurance policy and decide to keep the policies. You might each decide to be both the owner and beneficiary for the other person’s policy.
If you have a cash value policy, you and your spouse may decide to terminate the policy and then divide the cash value equally.
Other considerations may include surrender charges, which can reduce the surrender value of a policy.
Questions to Ask Your Attorney About Handling Life Insurance
When consulting with your attorney, keep in mind the fundamentals of why you purchased life insurance in the first place. Your attorney should then help you determine the future purpose of your existing and new policies in the context of the divorce. Some questions you may want to ask your attorney include:
- What should happen to my life insurance policies after my divorce?
- What insurance obligations will I have after my divorce?
- How do I verify my ex-spouse is insured?
- How do we calculate the appropriate amount of life insurance?
- How do we know if we are insurable?
Since life insurance is usually part of a broader financial or estate plan, it’s wise to consult with a financial planner who can guide you and help you assess the affordability of life insurance and the amount of coverage you need.
Chris Chen, CFP, of Insight Financial Strategists in Massachusetts, says, “Divorce gives individuals the opportunity to determine how they want to live separately and also of how they want to provide for the children they have together. For example, the supporting spouse may decide they will pay for their child’s college expenses. Therefore, they would want to determine if they need additional insurance coverage to account for this potential cost in the event that they pass away prematurely.”