Life insurance during divorce: What you should know
When you’re at the altar, you agree on “what’s mine is yours” — but what happens to your life insurance policy in a divorce?
When you get married, consider a few guidelines that govern how to treat your policy and beneficiaries if you make the difficult decision to separate. The path you take comes down to the type of coverage you have and the state you live in.
How divorce affects couples with separate policies
Some couples choose to take out separate life insurance policies — which makes the process easier in the event of a divorce. If you own an individual policy, it stays in your name.
If you listed your spouse as a beneficiary on that policy, you can update your beneficiaries by contacting your insurance company. Depending on your carrier, you’ll then be asked to fill out an online or paper form confirming the change. You may also want to update your will and notify your estate planner about your newly nominated beneficiary at the same time.
There’s one exception to this rule. If you designated your spouse as an irrevocable beneficiary on your policy, you need your spouse’s consent to remove them from your policy. That said, most insurers encourage you to nominate revocable beneficiaries, which you can change at any time — without an obligation to tell them.
What happens if I forget to remove my ex-spouse from my policy?
Depending on your state, you may already be protected against a payout you don’t authorize. Florida, Texas and more than 25 other states have laws on the books to protect policyholders who didn’t change a beneficiary after divorce. Under these laws, the ability for a beneficiary to receive a payout from an ex’s policy is revoked at the time of divorce. Instead, the money typically goes to heirs or other beneficiaries listed on the policy.
Divorce and joint life insurance policies
There are two types of joint life insurance policies: A first-to-die policy that pays out when the first spouse dies, and a second-to-die policy that pays out after both people have died.
Think of a joint policy as joint property — you’re both entitled to it. Now that you’re no longer together, you have three main choices when it comes to handling your coverage.
Option 1: Maintain the joint policy
You might decide to keep your coverage as is and come to an agreement about who pays the premiums to avoid the cancellation of your policy. It could involve splitting the premium payment in half or arranging for one spouse to manage the payment and the other to reimburse their share.
To protect yourself, it’s a good idea to draw up a legal document with the agreed payment terms.
Option 2: One spouse keeps the policy
You can transfer ownership of the policy into your or your ex-spouse’s name. It then becomes an individual policy, whereby the spouse who’s no longer on the policy has no claim over the proceeds.
Past premium payments may become an issue here. If you’ve removed yourself from the policy and the policy benefits somebody other than shared children — such as an ex’s sibling or parent — you might want to work out reimbursement for premiums you paid in the past.
A court order might also come into play. In general, joint policies that are purchased or paid for during the marriage are considered marital property and subject to court order. For example, a judge might order that a spouse maintain a policy with the ex and children as beneficiaries.
But if the courts aren’t involved, who should keep the policy is a personal choice. Life insurance is primarily designed to replace your income when you’re gone, so it often makes sense for the breadwinner to maintain some type of coverage.
Option 3: Cancel the policy
For a cleaner break, you and your spouse might agree to cancel your joint life insurance policy. Typically, this makes the most financial sense for exes who don’t have family to support or assets to protect.
Before you take up a new policy, however, consider that you might need to go through the underwriting process again — which can include a medical exam. Life insurance companies assess your age, health, family medical history, lifestyle and even hobbies when determining your coverage options and rate. If you bought the policy when you were younger, you’ll likely face a higher premium.
Why does the state I live in matter?
Community property laws apply to a handful of states that include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Tennessee, Texas, Washington and Wisconsin.
In these states, both parties have equal claim to all property acquired during a marriage — including life insurance policies. The law can complicate the division of assets in the event of a divorce, especially if the separation isn’t amicable.
Typically, individual term life insurance policies remain with the policyholder. But permanent policies that accrue cash value — like whole life or universal life — are often split between the spouses during divorce. If the issue goes to court, the judge makes a call based on the facts of the case.
The same goes for joint policies: If the couple can’t decide what to do, a judge will step in.
Can I buy life insurance for my ex-spouse?
Sure — on two conditions:
When you get married, the last thing you’re thinking about is divorce. But if things don’t work out, factors like the type of policy you own and where you live can determine the steps you must take to keep your coverage and make sure your designated beneficiaries are taken care of when you die.
Author Bio
Katia Iervasi is a writer for the insurance team at Finder. In addition to dozens of mortgage and personal finance pages, Katia has written more than 250 insurance articles that help readers understand the intricacies of policies across life, car, health and more.
