Divorce: Who Gets the Term Life Insurance Policy?
Term life insurance coverage can seem tricky when you are going through a divorce. In most cases, couples are not interested in maintaining their ex-spouses as beneficiaries on their life insurance policies. States consider spousal rights differently when it comes to maintaining a life insurance policy. Your attorney can give you more details about your insurance rights under your specific state laws. The following information provides an overview of how term life insurance is usually handled in the situation of divorce.
Policy Dictates Beneficiaries
It is important to make sure your term life insurance policy is up to date regarding beneficiaries. Unless the benefit is designated for payment to your estate, it will be distributed to those listed specifically as beneficiaries. Anyone, relative or not of the deceased, can be listed as a beneficiary on a life insurance policy. If the beneficiaries you’ve designated are no longer appropriate, you’ll need to change that portion of your policy to reflect your current circumstances. That can be a challenge if you are in the midst of a divorce, your life is in upheaval and you’re not sure who to designate. If you have kids, consider setting up a trust and leaving it to them.
Your life insurance payouts are not related to your will unless you authorize your benefit to be paid out through your estate. That means that even if you state in your will that your ex-spouse should not receive any of your life insurance benefits, your insurance policy supersedes your will in that regard. The best way to make sure an ex-spouse does not receive life insurance benefits is to remove him or her as a beneficiary on your policy.
Traditionally, term life insurance policies are not considered community property. If your spouse is not a designated beneficiary, he or she will not benefit from your policy. In the same manner, an ex-spouse will have no claim to your benefit unless he or she is a named beneficiary. You alone are the owner of your policy, and you make the payments toward maintaining it. Your spouse or ex-spouse is not considered part of that process and, therefore, may not benefit from your policy either in marriage or in divorce, respectively.
Changes in Consideration of Term Life Value in Divorce Proceedings
Recent divorce rulings have begun to redefine a term life policy as community property, especially in cases involving a terminally ill spouse. A Kansas court ruled that the benefit from a term life insurance policy should be considered community property in a divorce if the policy was purchased during the marriage and both spouses contributed to the premiums while married. With a term life policy, the benefit is not subject to change throughout the coverage period. If a court determines the policy should be considered community property, the surviving partner is awarded the full benefit as long as he or she contributed to the premium payments. Once the initial policy term expires, however, if the policy is renewed, it is no longer considered community property. Making changes to a policy that belongs to both parties can require a court order, and possibly an act of God if your ex is exceptionally stubborn.
Term Life Compared to Pension Rights
Recent California rulings have indicated that term life insurance policies should be treated similarly to the way pension rights are treated in a divorce. These rulings state that the ex-spouse has a contractual right to receive the death benefit, because the policy was purchased with mutual funds during the marriage. If the covered party is terminally ill or has a short life expectancy, the ex-spouse will be entitled to the death benefit the same way he or she would be entitled to a share of an ex-spouse’s pension. Terminally ill policyholders are different, because the policy is expected to pay out, whereas a policy paying is only a possibility with a healthy policyholder.
Courts have begun ruling that term life insurance policies should be given economic values for consideration in divorce settlements. The policies themselves may not have cash values, but their potential death benefits have real value. The value of a term life policy is much more relevant if the insured individual is suffering from a terminal illness. If the insured spouse is healthy enough to purchase a new life insurance policy on his or her own, however, the ex-spouse is not entitled to the death benefit from the old policy.
Life Insurance as a Divorce Settlement
Sometimes a term life insurance policy will be considered part of the alimony or child support determined in the divorce settlement process, especially if the insured spouse is terminally ill or near death at the time of the divorce. These types of settlements happen rarely, however, and should not be expected in most cases. The majority of term life insurance settlements do not specify that the ex-spouse will receive benefits unless the ex-spouse is mentioned by name in the policy as a beneficiary. Your attorney will be able to help you determine whether a benefit is payable in place of alimony or child support in your particular divorce settlement.
If the court determines you have to carry life insurance for your spouse, you’ll likely be buying a new policy, not renaming beneficiaries on your existing policy. This assumes your spouse is healthy enough to get a life insurance policy.
Courts Wary of Creating Death Incentives
A divorce court in Hawaii pointed out that it is in the court’s best interest to avoid making life insurance rulings that would cause one spouse to benefit too greatly from the death of another spouse, especially in hotly contested divorce cases. Ruling that a soon-to-be ex-spouse should receive a death benefit as part of a divorce agreement would create a potentially dangerous situation for the insured party. The Hawaiian court recommends divorce courts consider the inherent problems associated with these rulings.
In the Hawaiian court ruling, the court stated that a divorce settlement should not force one spouse to continue paying for a life insurance policy designated to benefit the other spouse. The ruling is flexible, however, for situations in which the first spouse is expected to die within a short period of time after the divorce is finalized. The dying spouse may be required to maintain the policy since the soon-to-be ex-spouse had been the beneficiary for the majority of the coverage term. A divorce attorney will be able to help you determine your rights regarding the death benefit of a terminally ill ex-spouse.
Viatical Offers as Leverage
Viatical offers have been legalized in most of the United States. These agreements allow individuals to sell their life insurance policies to third parties in return for immediate payment. The seller receives a sum typically less than the full benefit of the policy, while the buyer will continue making premium payments on the policy until the original owner dies. When the insured individual dies, the buyer will receive the benefit payment directly from the insurance company. The sale and purchase of life insurance policies have become a popular way for seniors in financial trouble to create new assets while younger investors benefit from the eventual payouts of policies.
Viatical offers have been used in some divorce court settlements as a way to determine the cash value of a disputed life insurance policy, especially in cases in which the covered individual is expected to die soon. The court can offer the insured individual’s life insurance policy on the open market to determine what an investor would be willing to pay for the policy. The market rate can then be used as the real cash value of the insurance policy for purposes of the divorce settlement.
Once the viatical value is established, you don’t need to sell the policy. It is simply a way of establishing the monetary value of the policy when dividing property equitably in divorce.
Equitable Distribution or Community Property
States fall into two categories when it comes to distributing term life insurance benefits after a divorce. Equitable distribution states have different regulations from community property states. Once you determine which category your state adheres to, you will be able to sort out the details of life insurance policy ownership.
In an equitable distribution state, a term life insurance policy generally is not treated as marital property. The term life policy has a specific ending date, which means the coverage ends when the term ends. The insured individual cannot take any loans against the policy, so it really has no specific cash value unless the insured dies. As with any life insurance policy, however, you must officially remove your ex-spouse as a beneficiary to ensure he or she will not receive any of the death benefit.
In a community property state, term life insurance is considered similarly to whole life insurance. An insurance policy purchased before the marriage and paid for by only one spouse can be claimed as separate property. If the term life insurance policy was purchased during the marriage and paid for with common funds, it is considered community property. In this case, the ex-spouse could receive benefits that equal the percentage he or she paid toward the policy or benefits could be based on a specific number of joint payments. Sometimes the policy is broken up as if it were a series of annual policies, and the determination of whether the policy is community property is based on who made the premium payments over the last year.
All Your Children
Sometimes the confusion about a term life insurance policy has more to do with the insured individual’s children than with ex-spouses, especially if the insured individual has children from more than one marriage. In general, the children listed as beneficiaries on the insurance policy will receive the death benefit, regardless of the status of their parent’s marriage.
Making the appropriate changes to policy beneficiaries is the only way to make sure each of your children receives the proper amount of your death benefit. You can list your children by name and determine the percentage each should receive in the event of your death.
Statistics show that more than half of divorced people remarry. If you marry someone who has children, your term life insurance policy will not automatically paid out to your stepchildren. If you want to make sure they receive a portion of your death benefit, you must add them to the beneficiary list on your policy. Any time you remarry, you should revisit your life insurance policy to make necessary changes. The nature of life insurance is to provide financial protection in case of an unexpected demise. Since accidents can happen at any time, it is important that you don’t put off making such changes.
If you are concerned about naming your children and/or stepchildren as direct beneficiaries of your life insurance account, you can appoint a trust that the account will pay into upon your death. The trust will pay the benefit in the manner you have specified. You can use the trust to create detailed guidelines for how and when the money will be distributed. The trust will be responsible for distributing the money according to your wishes. Such matters belong in the hands of an experienced family attorney.
Importance of Continuous Coverage
It can be tempting to simply close out your term life insurance policy when you are going through a divorce. However, as you age, your insurance rates will go up because your life expectancy is going down. Any illnesses you contracted while you were insured could make it difficult to purchase a new life insurance policy. Make sure you can afford to buy a new policy before you allow the old one to expire. Otherwise, you could find yourself without any coverage at all when you need it.