Amid the custody issues, dividing of assets, and adjusting to a new life, sorting out life insurance after a divorce may not be top-of-mind. But it is an important consideration, particularly for couples with children. To protect the financial interests of both parties and their dependents, making necessary beneficiary changes, accounting for the cash value of the policy, and ensuring that children are financially protected is essential.
Take the time to assess your options—and your longer-term financial plans—to determine the best way to protect your assets and your loved ones.
A divorce’s effect on your life insurance depends on the type of policy you have—term or permanent.
- Term life insurance won’t be treated like a financial asset during divorce proceedings, but it may be important to maintain if your family relies on your paycheck or if you’re a stay-home parent who provides childcare and other valuable family support.
- Permanent life insurance policies can be treated as financial assets during a divorce because they may have cash value that can be drawn upon. For example, you could access your policy value for college, a business or a retirement income shortfall.
Each person’s situation is different, and the process can be confusing, so here is a checklist of life insurance considerations during and after a divorce:
- Know what type of coverage you have. As noted above, permanent policies that accumulate cash value are considered assets. Term life insurance does not accumulate value and is not considered an asset. Your attorney may help you decide if and how a permanent policy can be split.
- Check your beneficiaries. Make sure your death benefit proceeds are going where you want them to go (such as to your kids, instead of your ex-spouse). If your kids are minors, you may have to establish a trust in order for them to be beneficiaries. Or if your divorce is amicable, keeping your ex-spouse as a primary beneficiary can help ensure your children are cared for if something happens to you.
- Consider your amount of coverage. Do you need more or less coverage if you’re no longer married? You may not be responsible for your ex-spouse’s future, but what about childcare or college costs for dependents? Figure out the amount of coverage you need so you can adjust it according to your situation.
- Organize your documents. Make sure your life insurance documents are organized and easily available. Divorces in some states may require an Affidavit of Insurance Coverage, which outlines all policies you and your spouse had at the time you filed for divorce, as well as policies that have been canceled within the past 90 days. An inventory of all current insurance policies will help you be prepared.
- Keep a list of questions for your attorney. Asking questions when talking to an attorney may help you determine the future purpose of your existing and new policies in the context of the divorce. Here are some questions to have at hand:
- What should happen to my life insurance policies after my divorce?
- What insurance obligations will I have after my divorce?
- How do I verify my ex-spouse is insured?
- How do we calculate the appropriate amount of life insurance?
- How do we know if we are insurable?
Once you and your ex-spouse go separate ways, some of your obligations may remain, making divorces a financially and emotionally complex process. Make sure you have all the information you need to organize your life insurance policy, and take the time to assess your options—and your longer-term financial plans—to determine the best way to protect your assets and your loved ones.