Divorce can feel like a rope unraveling—there are countless strands to unwind before you’re actually separated from your former spouse. Life insurance is an important part of those ties.
Though you might be ready to just cancel or cash out your respective policies, life insurance could still be a great (and potentially required) way to protect your kids and ex-spouse if something happens to you.
Here’s what you need to know to make informed decisions about life insurance as you go through a divorce.
Do I need life insurance after divorce?
Like all insurance after divorce, it depends on your specific situation. There are both personal and legal reasons why you may need life insurance after a divorce. For example, you may need life insurance after divorce if you’re court-ordered to have a policy in place (with your ex as the beneficiary). Or you may simply still want to provide for your ex and/or children if you were to pass away.
You should certainly review your life insurance policy after divorce, but don’t cancel your policy or remove your spouse as a life insurance beneficiary without first considering the legal and personal implications. Your legal or financial advisor can help with that analysis.
Life insurance beneficiary rules after divorce
Life insurance will likely be addressed in the legal terms of your divorce, particularly regarding a policy’s beneficiaries and death benefit amount. Here’s one of the common life insurance beneficiary rules after divorce: If you’re required to pay alimony or child care to your ex, your divorce decree might require you to keep your ex as a (or the) beneficiary. Or you may need to buy a new policy that would pay out a certain amount to your ex if you were to pass away.
To understand your particular life insurance beneficiary rules after divorce, talk with your divorce lawyer early and often. They can advise you on how life insurance should be involved in your specific divorce settlement.
Can I remove my ex-spouse from my life insurance policy?
That depends on the terms of your divorce, so consult your lawyer before acting. If you own the policy and you’re not financially supporting your ex-spouse after the divorce, you can likely remove them as your policy’s beneficiary. If you’re on the hook for alimony or child support, a judge may require you to keep your ex-spouse as a beneficiary so support continues if you were to die.
Is a life insurance policy considered a marital asset?
Whether or not your life insurance policy is an asset often depends on the type of policy it is: term or permanent. Permanent life insurance policies like whole life and universal life have a cash value component that can grow over time—these policies are often considered a marital asset since their value can be borrowed against or even cashed out. On the other hand, term life insurance doesn’t build cash value, which means it typically doesn’t count as an asset.
No matter what type of life insurance you have, it’s important that your divorce lawyer addresses the policy as part of your settlement. States have different laws that may come into play, some of which are more favorable to the policyholder than others.
Should I buy life insurance on my ex-spouse?
You might buy life insurance on your ex-spouse if you’ll remain financially dependent on them based on the terms of your divorce. But depending on your settlement, your ex-spouse might be court-ordered to get the policy themselves, so it may not make sense to buy life insurance on them if they’re already naming you as a beneficiary via their own policy.
Common types of financial support post-divorce include:
- Alimony: Payments from one ex-spouse to the other. This is intended to help the person receiving support maintain their pre-divorce lifestyle.
- Child support: Payments from one ex-spouse to the other. The recipient is typically the spouse with primary custody of the couple’s children. These payments help cover the costs of raising your children.
- Pensions/retirement plans: If your ex-spouse has a pension or retirement plan, you may be entitled to future payouts. This is considered financial support even though you won’t receive payments until their retirement age.
Depending on your scenario, a judge will decide if life insurance on your ex-spouse becomes part of the divorce settlement. Communicate with your lawyer about life insurance so they can advocate for you throughout the process.
If it’s your ex-spouse that needs to pay for a policy, you may want to arrange to be the “policy owner,” even if your ex will be paying the premiums. This guarantees that your ex can’t make changes to the policy (like removing you as a beneficiary) without your approval.
How does court-ordered life insurance work?
If your divorce decree includes child support, alimony, or any other kind of financial support, a judge may also require you to carry a life insurance policy with your ex-spouse as the beneficiary. This is considered court-ordered life insurance since it’s ordered by the judge.
The judge will usually assign a deadline by which your policy must be active. You should quickly start the application process and communicate with your ex-spouse and your legal teams about the policy details to ensure the one you buy satisfies the decree. You’ll also need to show the court proof that you obtained the required life insurance before the deadline.
Can I name my child as my life insurance beneficiary after divorce?
After your divorce, you may want your child to receive your death benefit. While this seems simple, it’s usually not advisable to name a minor child as your life insurance beneficiary.
In most states, a minor can’t legally accept a life insurance death benefit until they’re 18. If you die before your child reaches 18, your death benefit could get held up in the court system for years before a legal guardian can assign the funds.
Instead of naming your minor child as the primary beneficiary, consider instead naming whoever would be your child’s primary caretaker if you died. This may even be required by your divorce terms, and in any case will help avoid the payout getting held up in probate.
If you do name your minor child as a beneficiary, work with a financial advisor and follow these tips to help your policy serve your child’s best interests:
- Name a custodian: Select an adult you trust to act on behalf of your child. This does not need to be the surviving parent, but you’ll need to specify in your life insurance policy who it will be.
- Create a trust: A trust defines the division of assets to your heirs. By naming the trust as your life insurance beneficiary, your payout could go directly into the trust for your child/heirs. A trustee of your choosing will then oversee the benefits your child will receive.
Wondering how else you can use life insurance to support your family? Learn how much life insurance you should have and find out what child and spouse life insurance riders are.