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Going through a divorce can be emotionally stressful for you and your family. Not to mention, most divorces are long, expensive and complicated, particularly when it comes to the legal process of honoring a prenuptial agreement or dividing your assets and financial accounts fairly (if no prenup was signed prior to marriage).
Plus, you could have one or more insurance policies to consider (home, car, life, etc.). Read this to find out what happens to your insurance during a divorce.
Is Life Insurance An Asset That Can Be Split?
Often referred to as the “death benefit”, life insurance is one of the most important types of insurance you can buy because it’s meant to protect your loved ones financially after you pass away. Since it can involve a large eventual payout, life insurance may even qualify as a marital asset during a divorce (depending on what kind of policy you have):
Term vs Permanent Life Insurance
- Term Life Insurance – If you get divorced, your former spouse isn’t entitled to any proceeds from your term life insurance, because this type of policy has no true cash value while you’re still alive. Your policy only pays out a tax-free lump sum when you die and is therefore not recognized as an asset by the courts
- Permanent Life Insurance – In exchange for higher premiums, permanent life insurance offers lifelong coverage. A permanent policy also generates interest over time, which gives it cash value. As such, the court will consider it an asset, so your former spouse may have rights to at least a percentage of it in a divorce.
Insurance With A Cash-Value Component
As mentioned, many types of insurance can accumulate cash value throughout the years, especially when it comes to whole or universal policies, like permanent life insurance. When you pay your monthly premium, a portion of that money gets automatically transferred into a separate fund, where it will build interest.
The balance of this reserve is the cash value of your policy and represents part of your net worth. Because of that and your higher premium, you’re allowed to cancel your policy whenever you want and take the cash value instead (minus fees or penalties).
Unfortunately, the majority of divorces involve the division of marital assets. So, if your former spouse winds up getting half of your properties, you’ll lose half the cash value of your insurance policy, unless there’s a clause in your prenuptial that says otherwise.
When Should You Keep Your Ex-Spouse On Your Life Insurance Policy?
At the time you purchased life insurance, you may have added your spouse’s name to your policy, which might no longer be the case if you get divorced. Before you have their name removed from the policy, it’s important to understand that there are some scenarios where it makes more sense to keep them on as a beneficiary.
For example, if you have kids, the spouse who receives primary custody over them may end up relying heavily on the child support and alimony they earn following a divorce. If your spouse is the noncustodial parent and they die or fail to pay child support, that could leave you with a lack of funds for your childrens’ well being or education.
What You Should Do Instead
So you don’t lose out on money you’re entitled to, it may be safer to keep your former spouse on your policy for an amount that’s comparable to alimony or child support until all your children have become adults. This way, you won’t have to worry about the policy being nullified if your former spouse doesn’t make payments for some reason.
Alternatively, you can ask that your monthly life insurance premium be rolled into your ex-spouse’s alimony or child support payments, which would allow you to remain in full control of your policy without sacrificing benefits or having to pay a higher premium.
How Can You Change The Beneficiary Of Your Life Insurance Policy?
While you were married, it’s also possible that you listed your then-spouse as your main beneficiary on your life insurance policy, which would allow them to collect your payout if you passed away and use it to support themselves and/or your children. That payout could be especially important if you were the spouse/parent with the highest income.
This scenario is common and so is the desire to have your ex-spouse’s name removed from the policy in a divorce. Luckily, most life insurance policies are “revocable”, meaning you can change certain conditions, including beneficiaries whenever you want, as long as you’re the primary policyholder (joint-policies are a different story). All you have to do is contract your insurer and request your desired modification.
That said, if you have children that depend on your financial support, keeping your former spouse as a beneficiary until they’re old enough might be in their best interest.
The Importance Of Life Insurance After A Divorce
Until your children find incomes of their own and move out, chances are they’ll still be dependent on you and your spouse. When you and your spouse divorce, you could lose a large portion of your household income that would otherwise have paid for their food, clothing, tuition or school supplies. Of course, this situation will only get worse if you die and don’t have much money set aside for your children.
So, having a proper life insurance policy becomes particularly important once you reach a certain age. Even if you’re still relatively young and only have one child, you may want to ensure that they and their future guardian would be covered if something were to happen. The same goes for your former spouse, if they should pass away unexpectedly.
How To Determine A Sufficient Minimum Policy Amount
Typically, the more your monthly premium costs, the larger your eventual life insurance payout is, but if you’d like to calculate the minimum amount that your children or other beneficiaries might need in the years following your death, use this simple formula:
Factor in the number of years it will take before your youngest child becomes an adult. This could be when they turn 18 but you can always add a few extra years if you feel that they won’t be financially independent yet.
Once you’ve chosen an adequate time frame, multiply that amount by your gross annual income. Here’s an example:
- Your youngest child is 5 years old and your income is $50,000 yearly
- You want them to be covered until they’re done college at age 21
- 21 – 5 = 16 years until your child is financially independent
- 16 x $50,000 = $800,000 minimum insurance payout
Remember, this figure is just the minimum amount of money that could be needed to replace your income upon death. Although $800,000 isn’t pocket change, it may not cover every expense your child has until they reach full independence. This is particularly true when you have multiple children or if neither they (nor you) can depend on your ex-spouse financially after the divorce, so don’t forget to consider costs like:
- Household supplies
- School supplies
If you really want to ensure that your children are covered, you could even leave them enough money in your life insurance policy to buy or rent a home later in life. In the end, paying a higher premium is generally worth it when it comes to life insurance.
What Happens To Your Auto Insurance During A Divorce?
Although car insurance isn’t as valuable as life insurance, it can still be annoying to deal with during a divorce, so it’s best if you can resolve that part of the separation quickly. Nonetheless, there are several essential things to be aware of here, such as:
Removing Your Ex-Spouse From The Policy Without Their Consent
Before you try to close an auto insurance policy when your spouse is a co-policyholder or beneficiary, it’s important to understand that their name can’t be removed from the policy without consent. Since neither of you can legally drive uninsured, an amicable split is likely better than attempting to cut each other out of the policy.
Getting A New Policy
One spouse gets to keep the auto insurance, the other must apply for a new policy or find another provider. If you use the same provider for car and home insurance, you may want to ask for the policy, as bundle packages can be cheaper. However, if you’ve agreed to leave, shopping around and negotiating with other insurers could help you score you a great deal too.
Finalize Your Divorce & Separate the Insurance
Prior to cancelling your auto insurance, think things over carefully, as you could find yourself uninsured if you and your spouse decide to work things out. If the marriage isn’t salvageable, form an agreement, then follow these steps to separate yourselves from your policy:
- Change Your Address – To separate liability from one another on your auto insurance policy, one spouse needs to get a new address.
- Buy a New Policy Prior to Cancelling Your Current One – Make sure to activate a new policy so you don’t accidentally drive uninsured in between.
- Separate Your Vehicle Titles – If both spouses are listed on a car’s title, one of you needs to make arrangements to have yourself removed from it.
- Sign a Removal Request – Finally, one spouse has to formally request for their name to be taken off the policy, which requires a signature (consent).
Is Home Insurance Affected In A Divorce?
Similar to auto insurance, this depends if both spouses’ names are on the home insurance policy, which is more than likely if you were formerly married. In that case, the simplest solution would once again be to form an agreement with your ex-spouse, contact your insurer and ask to have one person’s name removed from the policy.
Separation vs Divorce
Then again, your divorce might not be amicable, particularly during the proceedings when both parties are stressed and dealing with legal rigamarole. Like car insurance, it’s important to wait until your divorce is finalized before either of you get a new policy.
For instance, if you’re only separated and your spouse still has the key to your home, they could do serious damage to the property and leave you on the hook for the insurance. If you’ve filed any similar claims in the past, the provider may drastically increase your premium or revoke your home insurance altogether.
With divorce, on the other hand, the legal rules are clear when it comes to the division of assets. Most judges won’t allow you to change your home insurance policy until the divorce is confirmed in court. It’s also best to keep both names on the home insurance until one spouse moves out and is able to get a new policy for another dwelling.
Trying To Separate Your Insurance During A Divorce?
In a divorce, dividing up your assets, finances and insurance policies is normally long and inconvenient, so it can be smart to hire legal help to guide you through the process. However, if you’re about to get married and simply want to avoid this danger in the future, signing a prenuptial agreement with clear terms is probably a better idea.
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