Tips for managing life insurance after divorce

People often buy life insurance to help family members stay financially secure after the policyholder's death. Yet, when a marriage ends, the topic of life insurance after divorce may be overlooked.

Points to consider when dealing with divorce and life insurance

These tips may help you and your soon-to-be-ex discuss important changes to your policies before you sign the papers:

• Determine how much coverage you'll need. Examine what your ex-spouse's financial situation would be like if alimony and/or child support payments ended. Speak to your State Farm® agent and divorce attorney to help establish a specific amount. One popular way to get a ballpark estimate for a benefit amount is using the age of your youngest child. Using the number of years until your youngest child turns 18 (some parents opt for 21, 22 or a different age altogether, it's entirely up to you), and multiply that number by the yearly income of the parent that the policy is being applied to. This may help you determine how much life insurance you need.
• Read the divorce agreement carefully. Oftentimes, life insurance policies are used as security for continued alimony and child support payments. Before you sign any documents, consider whether they meet your needs and your ability to comply. Divorce agreements are legally binding and can be difficult to alter. Discuss any questions you might have with your legal representative.
• Discuss the duration of coverage. The time frame for any obligatory life insurance coverage varies, often depending on the length of the court-ordered alimony and/or child support. These are typically temporary needs. You can ask your insurance agent about a term policy that could be used to help meet the financial obligations of raising your children or providing your ex with financial support should you pass away. Consider the differences between term and whole life insurance.
• Decide who will pay the premiums. Having your ex-spouse pay the insurance company may be convenient, but if you're concerned about the possibility of default, talk with your lawyer about having payment responsibility written into the divorce agreement. Or, have your ex add you to the policy record so that you may receive duplicate copies of billing and lapse notices. Failure to pay the premium could result in your policy canceling.
• Re-designate beneficiaries. Depending on the divorce settlement, many couples will rename the beneficiaries of the life insurance from their ex-spouse to their children or create a trust to handle the proceeds of a death benefit. In some states, probate laws automatically disqualify a former spouse from receiving life insurance proceeds unless the insured re-designates their ex-spouse after the divorce. If the children are minors, consider appointing an adult custodian or trust to receive and handle the benefits on their behalf. Be specific about when the children will receive the money and what percentage each will receive. Also, keep in mind that beneficiaries cannot be re-designated after the insured's death, so it's critical to keep the policy up to date.
• Consider life insurance as a single parent. In many cases, a divorce results in someone becoming a single parent. This can come with many new considerations and challenges to account for. Being the sole provider for a child or children makes the importance of life insurance even clearer. Without you, they may have limited or no other source of care. For that reason, determining your minimum benefit amount may help you plan for a life insurance policy that can properly provide for your children or other dependents in the event of your death.

Other relevant information about life insurance and divorce

• Is life insurance a marital asset? The short answer: It depends on the policy. Whether a particular life insurance is considered a marital asset depends on its cash value. If a policy has a cash value, that value is considered a marital asset. Term life insurance isn’t considered an asset because it doesn’t have cash value, but whole life or universal life insurance policies can be treated as marital assets.
• What is the cash value of your life insurance policies? The cash value is generally determined by premiums paid, how long the policy has been in effect and the size of the death benefit provided by the policy. The specific value will vary based on your insurer. Being aware of this cash value can be important as it may play a factor in divorce proceedings as to whether it’s considered a joint or separate asset, and how assets become divided between both parties.
• Was life insurance court ordered in the divorce? If the divorce involves child support or alimony, the court typically requires the person paying the alimony or support to have an active life insurance policy. If the payer already has an active policy, the court may require it to be maintained. This helps ensure that if something happens to the payer before the support or alimony order is fully paid, the receiving party will still receive financial support. Both parties will have to work with their legal counsel to determine policy specifics such as the necessary amount of the policy, the actual owner of the policy, who will pay the premiums, the named beneficiary and how the payouts are allocated if there’s more than one beneficiary.
• Can I have a life insurance policy for my ex-spouse? This question comes up more than you might think. There are certain situations where a divorced person can have a life insurance policy for their former spouse. This requires an insurable interest, meaning if you’re legally owed financial support from an ex-spouse, you might have a financial interest that allows you to hold a life insurance policy for them.

You can get a life insurance quote now, or if you have questions about managing life insurance after a divorce, give us a few details and a State Farm agent will reach out to you.