If you are lucky, your divorce will be a simple process. In fact, it’s possible to get divorced without hiring an attorney. This can save you a lot of money. But for most couples, this is not a wise option, as they have many issues to sort through. Some of the issues may be complicated, some of them may be quite contentious. One of the most important issues also is one of the most overlooked: Life insurance. Today’s blog will briefly explain how life insurance works in a divorce, and why it is so important to be sure to address this topic.
What People Who Are Getting Divorced Need to Know about Life Insurance
Even apart from divorce, life insurance can be confusing and overwhelming. Here is a quick review from Investopedia on the different types of life insurance and some of the key terms to know.
Death benefit: A payout to the designated beneficiary of a life insurance policy when the insured person dies. Learn more about death benefits.
Designated Beneficiary: A person or persons who have been named to receive the death benefit. Learn more about designated beneficiaries.
Term life insurance: A type of life insurance that guarantees a death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to terminate. Insurance companies sometimes call term life insurance “pure life insurance.” Learn more about term life insurance.
Whole life insurance: This insurance provides coverage for the life of the insured person. In addition to paying a death benefit, whole life insurance contains a savings component in which interest may accumulate on a tax-deferred basis. Insurers sometimes call these policies permanent life insurance or traditional life insurance. Learn more about whole life insurance.
Universal Life Insurance: This policy is similar to whole life insurance, except it offers low, flexible premium options. These policies also can accumlate a cash value. Learn more about universal life insurance.
Premium: The payment required by the insurer.
Key Life Insurance Details To Consider in a Divorce
With everything else there is to think about in a divorce, it’s easy to overlook your life insurance. Besides, no one likes to think about dying. Even so, taking time to focus on your life insurance in a divorce is a very wise decision. Here are the top three things to consider about life insurance in a divorce:
- Changing the beneficiaries: So that your ex-spouse will not receive the death benefit.
- Accounting for the cash value of an existing policy: This may be considered an asset that must be divided.
- Purchasing a new policy: This will be important if your divorce is likely to include alimony or you have children.
Why You May Want to Revise Your Policy Before Getting Divorced
If you already have a life insurance policy, you probably named your spouse as the beneficiary. If this is the case, you may want to change the beneficiary before the divorce. You can then name your children as the beneficiaries.
The goal, of course, is to ensure that if something happens to you, the payment will go to your children, and not to your ex. This is especially important if you are concerned that your ex may be inclined to use the money irresponsibly.
Be aware that if your children are minors, the court probably will assign an adult custodian to manage the funds on their behalf. Alternatively, the court may establish a special trust.
Is Life Insurance Considered an Asset in a Divorce?
Some life insurance policies accumulate cash value over time. When you pay your monthly premium, a portion of that money earns interest. The balance of this fund is the cash value of the policy. Courts consider the cash value of the policy part of your net worth. In that sense, the court definitely considers a life insurance policy to be an asset in a divorce. Read our recent blog about a high net worth divorce.
Is the Cash Value of a Policy Divided Equally in a Divorce?
Sometimes. This is because Texas is a community property state. This means that in a divorce, the court will usually split the assets the partners acquired while married equally. However, courts usually do not consider property owned by either spouse prior to the marriage to be community property.
For example, if one spouse purchased the policy before getting married, the cash value of the policy may be considered separate property.
On the other hand, the court may rule that the cash value of the policy is community property. In that case, Texas law states the proceeds from the sale of the policy will be equally divided. Also, if there are any premiums that must be paid in the future, the court will try to divide that obligation equally as well.
In short, how life insurance works in a divorce will vary based on the circumstances. This is just one way that an experienced family law attorney can help you navigate the divorce process.
Purchasing a New Policy Before a Divorce is a Good Idea
If your spouse is the higher income earner, the court is likely to assign him or her to pay you alimony. (The Texas Family Code Section 8.001 refers to alimony as “maintenance.”) If you will be dependent on these payments after the divorce, a life insurance policy will ensure that even if your ex should die, you will receive at least some financial compensation.
Further, if you have children, the court may order your spouse to pay child support. Again, if you will be counting on these payments to help you provide for your children, the policy is important. It will help ensure that you can continue to provide for your children despite the death of your ex.
In fact, if you do have children, it is likely that the court will require both of you to purchase life insurance policies. The court’s objective is to make sure the children are provided for regardless of who should pass away.
Can You Take Out a Policy On Your Spouse Before a Divorce?
As mentioned, the court is likely to require both you and your spouse to purchase life insurance in a divorce. In addition, if your spouse will be paying you child support and/or maintenance, you can take out a life insurance policy on him or her. In fact, this often is a good idea.
Be aware, however, that your spouse has to agree to complete the application and underwriting process. If you are already involved in a difficult divorce, this issue might well add an unnecessary complication.
Why You Should Include Life Insurance Details in Your Divorce Settlement
We believe it is wise to make sure you have all the details of the life insurance policy settled. This is because even if your divorce is amicable, things can change.
For example, you and your ex may have a big disagreement in the future. He or she may then decide to “get even” and not pay the premiums. Or your ex may decide to change the beneficiary. Either of these actions could jeopardize your benefits.
By including life insurance as part of the divorce decree, you will have legal backing to compel your ex to continue making payments. You also will have the right to oppose a change in beneficiary.
There is another benefit to addressing this issue upfront: The insurance company may find your ex to be uninsurable. This is usually for health reasons. By including life insurance details in your divorce settlement, you can arrange for other options to secure your settlement payments.
Can You Make Your Ex Get Life Insurance After a Divorce?
As mentioned, it usually is better to set up life insurance before the divorce. However, you can still compel your ex to get insurance after the divorce settlement. The court will require you to prove that you have a legitimate financial interest. If you are receiving maintenance and/or child support, this should be easy to accomplish. The court can then order your ex to apply for a life insurance policy.
The Attorneys of Maynard Law Firm Understand How Life Insurance Works in a Divorce
Divorce is an unpleasant topic. So is life insurance. When you put them together, there is plenty that can go wrong. The attorneys of the Maynard Law Firm, PLLC, are experts in Texas family law, including cases involving life insurance policies. With offices in Southlake and northwest Fort Worth, we are conveniently located to handle divorce cases through much of Tarrant County. If you want to work with attorneys who are experts in how life insurance works in a divorce, we are ready to serve you with experience and compassion. Call us today at 817-335-9600.