Divorce can be an intense and complex process from both an emotional and financial standpoint. Individuals who are going through a divorce often have to deal with dividing assets, establishing themselves financially, and managing the social impacts that the action might have on children. In all of this complexity, it may be easy to forget about life insurance. Married couples often have life insurance policies to insure that each spouse will be financially stable should the other spouse pass away. The spouses are commonly the beneficiaries of each other’s policies.
However, divorce can affect a couple’s plans. When a couple splits, the spouses may feel that they no longer need to have life insurance. They may also change the beneficiary on the life insurance to a parent, a new partner or someone else. However, just because a marriage has ended does not meant that financial responsibility for the other spouse or children has also ended. In many cases, it is important to carry life insurance for one’s spouse after divorce.
Three Common Life Insurance Needs After Divorce
There could be a wide variety of reasons why life insurance may be needed after divorce. However, these are three of the most common reasons:
For the benefit of the custodial parent: The most common life insurance need is to protect child support payments for the benefit of the custodial parent. Even in joint custody arrangements, one parent is typically named the custodial parent. The other parent is then declared the non-custodial parent and is often required to make child support payments.
Should the non-custodial parent pass away, the custodial parent could face a very difficult financial situation. For this reason, it is common for the non-custodial parent to continue holding life insurance with the custodial parent as beneficiary after the couple has ended their relationship.
To protect spousal support payments: Similar to child support, alimony would also end if the paying spouse passed away. Again, that could lead to financial challenges for the spouse who receives the support payments. Spouses who receive payments can often negotiate a requirement that the paying spouse carry life insurance to back up the payments into the divorce agreement. If the spousal support is only temporary, then the paying spouse may get a term policy that will lapse after the support period ends.
To protect the non-custodial spouse: Many people assume that only the custodial spouse needs to be protected. However, the non-custodial spouse would likely also face some challenges if the custodial spouse passed away. That spouse would probably take custody of the kids and take on the full brunt of childcare responsibilities. He or she may have to pay for daycare or hire a babysitter in order to go to work, and that person might have to pay for all medical costs, school fees, clothing and other expenses.
That is why it is often important for the custodial spouse to also carry life insurance for the benefit if either the children or the non-custodial spouse. Again, depending on the ages of the children, it may be best for the insurance to be a term policy that ends when the children reach adulthood.
Important Beneficiary and Ownership Considerations
It is important to remember that a former spouse is not obligated to carry life insurance or keep a former spouse as beneficiary unless it is specifically stated in the divorce agreement. Many spouses neglect to address this issue, assuming that their former spouse will maintain the insurance policy the way that it was during their marriage. However, in many cases, a spouse may have changed the beneficiary to his or her parents or to a new partner. At that time, there is nothing that can be done, and it may be too late to address the issue. That is why it is critical that both parties discuss life insurance during divorce negotiations or in court.
In addition, it is important to remember that the owner of the policy is the only person who can change a policy’s beneficiary. In some cases, the beneficiary rather than the insured will actually own the policy. Under such policies, the beneficiary can be certain that the insured spouse does not change the terms of the insurance to direct the money to someone else.
Finally, parents should think twice before making children beneficiaries on life insurance. Parents often assume that if the money is meant to support the children, then it should be given directly to the children. They also may wish to keep the money out of the hands of their former spouse. However, many life insurance companies will not pay benefits to children, and the issue may be taken to court. The court could grant control of the death benefit to the former spouse if he or she is the custodian of the children.
Spouses who really wish keep their life insurance benefits out of their former spouse’s hands may be better served by establishing a trust for the children and naming the trust as the beneficiary of the insurance payouts. The trust can then distribute money to the children as needed or until they are old enough to handle the money themselves.
There is no solution that is right for every person. As is the case with most things in divorce, couples are best served by keeping an open, civil and honest dialogue about life insurance and each spouse’s needs.