If you have a life insurance policy on yourself, chances are you listed your spouse as beneficiary - or the person to whom a payout would be made if you died. Depending on your situation and the presence of children, you might consider changing your beneficiary designation. Likewise, if you have a will, you may need to make changes to it to reflect your current wishes should you pass on.
Insuring future alimony and child support payments
Will you receive alimony and/or child support after your divorce? Then you should explore options to protect this income. After you are divorced, and your ex-spouse dies, this money will stop. Financial advisors may suggest, among other things, that you purchase a life insurance policy on your ex-spouse. The policy should be sufficient to replace the money you are expecting to receive in alimony and child support payments.
Depending on your situation, it might make more sense to pay the premiums yourself. This protects you from depending on the person you are no longer married to in order to keep the payments current. Missing payments can cause the policy to lapse.
Protecting your ownership rightsWhether you are purchasing a new life insurance policy or using an existing policy on an ex-spouse, you should make sure you're the owner of the policy. Keep in mind, the policy owner is able to change the beneficiary. If you're not the policy owner, the beneficiary could be switched after the divorce, leaving your income unprotected. It may be possible to use an existing policy which your soon-to-be ex-spouse owns. If this is the case, consult with your attorney, they can explore having the policy ownership transferred to you as part of the divorce proceedings. There is additional paperwork that you both would need to complete with the insurance company to make the switch happen.
Splitting cash value
Some types of life insurance build cash value. This is money in the policy that you can access while you're alive. Permanent* life insurance policies like whole life insurance or universal life insurance build cash value. Term life insurance policies, however, don't build cash value. Life insurance cash value is an asset, and can be considered a marital asset during divorce proceedings.
It's important to understand your life insurance coverage and options before getting divorced to ensure you have the right protection in place after your divorce. Understanding policy ownership, options for beneficiaries and how to provide for children are critical considerations but may not be the only things you need to review in your personal situation. It's always wise to speak with your financial advisor or lawyer so that you don't have to navigate these proceedings alone. Your preparation, and some sound financial advice, can go a long way toward making this transition a little smoother for you and your family.
* As long as required premium payments are timely made.