What do life insurance and divorce have in common? Besides being confusing, they’re both uncomfortable realities that most people would rather avoid. They are also often intertwined. If you don’t understand how life insurance works in your divorce, you and your loved ones can suffer huge financial consequences after your divorce is over.
The Role of Life Insurance in Divorce
Life insurance comes into play in two different ways in divorce. It can be a marital asset that gets divided in your divorce. It can also be used as security for child support, spousal support, and other financial obligations that arise from your divorce.
Life Insurance as an Asset
Not all life insurance is an asset. Only life insurance that has a cash value counts as an asset in your divorce. Typically, whole life and universal life insurance policies have cash values. Term insurance does not. (TIP: Life insurance that you get through your employer is usually term life insurance. It rarely has any cash value.)
Term life insurance is typically in effect for a certain period of time: a “term.” After the term is over, the policy expires. If you want to continue to be insured, you then have to get a new policy.
If you die during the life insurance term, the policy pays your beneficiary a death benefit. Because term insurance has no cash value, the premiums are typically much cheaper than the premiums for whole or universal life insurance policies.
Whole and universal life insurance policies have no set term. Unlike term policies, they don’t expire. They simply continue on for as long as you pay the premiums.
Like term insurance, whole and universal life insurance pay a death benefit to your named beneficiary when you die. But, unlike term insurance, whole and universal life insurance policies also accumulate value while you are alive. That makes them an asset in your divorce.
Life Insurance as Security
Life insurance is typically used in divorce to secure ongoing financial obligations from one spouse to the other. It can also secure financial obligations to the children. So, for example, if you have to pay your any kind of support, you may be required to maintain life insurance with a death benefit big enough to cover those payments if you die.
Life insurance may be required to secure the payment of:
- child support,
- children’s medical and educational expenses,
- children’s college expenses,
- spousal support/maintenance/alimony,
- any other type of ongoing financial obligation from one spouse to another.
What You Need to Know About Life Insurance and Divorce
The first thing you need to know about life insurance in your divorce is to look for it!
It’s easy to forget about life insurance policies, especially if they have been around for years and are fully paid. What’s more, sometimes people don’t realize that a particular life insurance policy has a cash value. They assume that life insurance only has value if you die. Investigating whether you or your spouse has life insurance, and what kinds of life insurance you have, is definitely worthwhile.
If you need to use life insurance to secure child support or spousal support, you are more likely to pay attention to life insurance in your divorce. But, knowing whether life insurance exists, and what kind of life insurance it is, is only your first step. Knowing the beneficiaries of those policies (and updating them after your divorce) is equally important.
Who is the Beneficiary of Your Ex’s life Insurance?
Many people have divorce judgments that require them or their spouse to have life insurance to secure support. Unfortunately, most of those people never follow up after their divorce to make sure that: a) the required life insurance policy exists; and b) they are the beneficiary of that policy.
I know this sounds pretty basic, but life insurance only works if you have it. And, if you (or your spouse) dies without it, you can’t go back and buy a policy retroactively.
It doesn’t matter what your divorce judgment says. If your ex was supposed to maintain life insurance to secure support, and your ex dies without having that insurance, you are screwed.
Yes, if your ex didn’t maintain life insurance like your divorce judgment required, you may be able make a claim against his/her estate to get your money. But if there aren’t enough assets in your ex’s estate to pay you, what are you going to do?
Making a claim in a probate estate can also be a long and drawn out process. Pursing that claim usually requires an attorney, too. So, at the same time your child support/spousal support money has dried up, you will have to find the money to hire an attorney to make a claim against your dead ex’s estate, while also trying to pay your own bills with less money coming in the door. That is not the position you want to be in.
What if I’m Already the Beneficiary?
You may think that, if you were the beneficiary of your spouse’s insurance policy while you were married, you’re still the beneficiary if you get divorced. Unfortunately, that may not necessarily be true.
Many states have laws that say that a couple’s divorce automatically revokes any beneficiary designation between the former spouses. That means that, if one spouse named the other as a beneficiary on his/her life insurance policy during their marriage, when they divorce, the ex-spouse is no longer considered to be the beneficiary of that policy.
The problem is that your state may or may not have such a law. Plus, the federal government has its own laws. So, no matter what you or your ex may “intend” if you don’t update the beneficiary designations on your life insurance policies after you divorce, you may be unpleasantly surprised at what happens when one of you dies.
What Happens if My Ex Doesn’t Update His/Her Beneficiary Designation After Divorce?
No matter what your divorce agreement says, if you and your ex don’t update the beneficiary designations in your respective life insurance policies you may end up like this recent Supreme Court case.
In Hillman v. Maretta, Warren Hillman, a federal employee who lived in Virginia, died, leaving both a wife, Jacqueline Hillman, and an ex-wife, Judy Maretta. He had named his ex-wife Judy as the beneficiary of the life insurance he had through his employer when they were married. He did not change that beneficiary designation after his divorce.
When Warren died, the life insurance company paid his ex-wife Judy, not his then-current wife, Jacqueline. Not surprisingly, Jacqueline then sued Judy for the money.
According to Virginia law, Judy automatically stopped being Warren’s beneficiary when they got divorced. Federal law was exactly the opposite. Under federal law, because Judy was the named beneficiary when Warren died, she, not Jacqueline, was entitled to the proceeds from the policy.
The Supreme Court found that the federal law took precedence over the state law. So, even though Warren and Judy had been divorced for ten years before he died, Judy received the proceeds from his $124,000 life insurance policy.
Dealing with Life Insurance After Divorce
The biggest problem with life insurance and divorce is that, once your divorce is over, you tend to forget about life insurance. You just want to put your divorce behind you. So, like Warren Hillman, you forget to change your beneficiary designations. Or you forget to follow up with your spouse to make sure that s/he changed his/her beneficiary designations. Then, later on, you end up with a mess.
It’s also not uncommon for the spouse who is required to maintain life insurance to just not do it. That puts the other spouse in the unfortunate position of being “the bad guy.” That spouse then has to decide whether to make a big deal over life insurance when it may never even matter.
Unfortunately, once life insurance does matter, it’s too late to get it.
No one wants to keep harping at their ex about life insurance years after their divorce is over. Yet not making sure that proper life insurance exists, with the right beneficiary, can have disastrous financial consequences. So, what can you do?
5 Tips for Staying on Top of Life Insurance After Your Divorce
- Require Proof of Insurance. If your ex is required to maintain life insurance make sure that s/he is also required to provide you with proof of insurance. If possible, write this requirement right into your divorce paperwork.
- Get Authorized to Get Proof Directly From the Insurance Company. If you are not yet divorced, include a provision in your divorce judgment that authorizes your spouse’s insurance company to talk to you. That way you can verify that the required life insurance is in effect yourself. You won’t have to hound your spouse for information.
- Discuss the Situation with Your Ex. If you are already divorced, see if your ex will agree to authorize his/her insurance company to give you proof of insurance directly. You may doubt that your ex would ever agree to that. But, honestly, your ex probably doesn’t want to hassle with life insurance any more than you do. Allowing you to talk directly to the insurance company makes everyone’s life easier.
- Verify Coverage Annually. Put a notice in your calendar to ask your ex (or the insurance company) for an updated proof of insurance at least once a year. You also may be able to arrange for the insurance company to notify you if the policy is ever cancelled, or lapses.
- Consider Taking Stronger Action. If your ex absolutely refuses to give you proof that the required life insurance exists, you may want to consult with a lawyer. Figure out your options. Going back to court may be the last thing you want to do. But, if you are relying on the support you get from your ex in order to survive, then not making sure that your ex has life insurance can be the biggest financial mistake you ever make.
The Bottom Line
After you are divorced, life insurance can be a critical part of your overall financial plan. Constantly making sure your ex has the right life insurance can be a giant pain. But, that is nothing compared to the pain you may experience if your ex dies, leaving you flat.
Following up on life insurance is only one thing you need to do after your divorce. There are 20 other things you need to do after your divorce is final! Wonder what they are? Click the button below to get your FREE Post-Divorce Checklist!