Divorce can be a difficult situation for all involved, especially when it comes to finances. If you and your spouse decide to part ways after purchasing life insurance coverage, you may wonder what to do with the policy.
State law and your divorce decree will ultimately dictate how your policy is handled. But in general, here’s how life insurance and divorce work so you can feel prepared as you navigate divorce proceedings.
When You Might Cancel Your Policy
First, consider who the life insurance policy insures and who owns the policy. For example, you may have purchased a policy to cover your spouse to ensure financial security if they were to pass. When you divorce, you’ll own a policy on your ex-spouse, which could be a problem.
To start or maintain a life insurance policy on someone, you must have an “insurable interest” in them (meaning you might experience financial loss if they were to pass). If you no longer have any connection to your ex-spouse, you likely don’t have an insurable interest, depending on your state’s laws. Accordingly, you may have to cancel the policy.
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Existing Policies May Be Split
Life insurance policies are subject to division during a divorce like any other asset. Term coverage isn’t typically considered a marital asset to be divided because it doesn’t contain cash value. Permanent policies that have cash value, such as whole or universal life, normally are.
When You Might Keep Your Policy
If you have an insurable interest in your ex-spouse, you may be allowed to keep a policy on them. Check your area’s laws if you’re interested in maintaining coverage.
In some cases, you may be required to keep a policy on your ex-spouse as part of the divorce settlement. For example, you may rely on your ex-spouse for alimony or child support. If they were to die, you’d no longer have that financial support and your children could be impacted as a result. The judge may mandate that you take out a policy to make up for those resources. Even if you aren’t required to, it may make sense to have a life insurance policy in force in this situation.
When You Might Get a New Policy
Depending on the nature of the divorce, your spouse may no longer be in the picture. But you may have children who financially depend on you. In this situation, consider who will care for your children if something were to happen to you and whether they may need financial support.
If you don’t already have a life insurance policy, you may want to take out a new policy, naming your children or a trust set up for them as the beneficiary.
Why You Should Update Beneficiary Information
For any life insurance policies you own or intend to keep, make sure to update the beneficiary information. When you took out the policy, you might have named your ex-spouse as the beneficiary and your kids as contingent beneficiaries. If you keep your ex-spouse as the beneficiary, they’ll receive the death benefit. If that’s still your preference, you can leave the policy beneficiary as is. If not, you may want to name your children, other family members, or new spouse as beneficiaries instead.
Failure to update your beneficiary designation could cause emotional and financial turmoil for your family, who may be expecting or relying on the life insurance payout.
Moving Forward after a Divorce
Divorce can be stressful, but you don’t have to do it alone. If you have questions about navigating life insurance and divorce and securing appropriate coverage, reach out to a trusted financial professional for a personalized look at your situation.
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