Divorce can be an incredibly complicated and difficult process.
In fact, divorce is ranked as the second-most stressful situation a person can face. It’s even more stressful than going to jail or the death of a close family member!
If you’re going through a divorce, your list of worries might seem endless. Where will you live? How will you divide your assets? Who will get custody of the children? How will you help them to cope?
It’s no wonder that things like life insurance are often overlooked during divorce proceedings. Sorting out life insurance is a crucial part of the divorce process, though, especially if children are involved.
Read on to understand more about life insurance after divorce.
What type of policy do you have?
Before you can sort out your life insurance, you need to understand your insurance policy.
There are two basic types of life insurance:
- Temporary or term life insurance. This is the most affordable type of life insurance. Common terms are 10, 20, or 30 years, and these terms are renewable. You have coverage as long as you continue to pay the premiums.
- Permanent, whole, or universal life insurance. This type of policy covers you for life and isn’t affected by increasing age or health problems. It also builds cash value over time that you can access during your lifetime.
It’s important to know which type of insurance you have because each type of policy will be handled differently during a divorce.
Now that you understand your coverage, what are some things you should do with your life insurance after divorce?
If your policy allows for it (most do), the first thing you need to do is change your beneficiary.
In the divorce agreement, your spouse may agree to waive all rights to insurance benefits. Be aware, though, that getting divorced does not automatically cancel those rights.
You must submit a change of beneficiary form to the insurance company in order for the change to legally happen.
If you have no children or ongoing financial obligations, it may be simplest to remove your spouse’s name and choose a new beneficiary. This could be your child, parent, or another family member.
It’s also vital to update your new beneficiary on other legal documents, such as bank accounts and retirement plans. It’s not enough to make the change in your personal will – although you should definitely update that, too.
Split the cash value
If your life insurance policy has accrued cash value over the years, this needs to be included with your dividable assets. Think of it as being in the same category as bank accounts and stock portfolios.
Don’t make the mistake of overlooking “hidden” wealth that might be disguised inside your insurance policy. Failing to do so could result in you not getting your fair share of the money.
During the proceedings, be sure to include either a buy-out or a revised coverage plan. Whatever agreement you make about life insurance after divorce should work for both parties.
Even more importantly, it should protect your dependent children.
Protect your children
If you’ll be relying on alimony and/or child support after the divorce, it’s essential to make sure that income is protected.
Don’t make the common mistake of leaving the premium payments up to the “responsible” party. That person may not be so responsible, after all, or outside circumstances could affect his or her ability to pay the premiums.
A serious health problem or prolonged unemployment could leave you and your children in the lurch.
You also need to think about the worst-case scenario. What if your ex-spouse unexpectedly dies? Those alimony and child support payments will end. How will you make up the difference so you can provide for your family?
One way is by setting up a life insurance policy on your former spouse. The premium should be high enough to cover the costs of child support and alimony payments you would be receiving if your spouse were still alive.
Other insurance concerns
As a newly single parent, you’ll want to evaluate your own post-divorce insurance coverage. Life, health, disability, and home or renter’s insurance should all be factored into your monthly budget.
It’s morbid to think about, but what would happen to your children if you and your spouse were both gone? To ensure your children would have what they need, you should purchase your own life insurance policy.
How much money will your children need? The simplest way is to multiply your annual income by the number of years until your youngest child turns 18.
For example, let’s say your annual income is $50,000 and your child is six years old. A death benefit of $600,000 would be sufficient to replace your income until your child is finished with high school. If you want to play it extra safe, a $750,000 policy would cover your child until the age of 21.
Whichever route you choose, personal life insurance after divorce is vital to provide for your family.
Seek professional advice
During a divorce, your money might already be spread too thin. Taking on another financial obligation is probably the last thing you want to do.
Seeking professional help, though, can help you to understand your rights and avoid making common mistakes. How does alimony and child support work? How will divorce affect your taxes? Who’s responsible for shared debts and assets?
A tax adviser, CPA, or a certified divorce financial planner will answer all these questions and more. He or she can help you navigate your new circumstances and spot anything you may have overlooked.
They can also help you with other important financial goals as you adjust to your life post-divorce.
Life insurance after divorce
Divorce is not pleasant for anyone involved. With the right tools, though, you can successfully navigate this life-changing situation.
Whether you already have coverage or you’re among the 56% of Americans who don’t carry any life insurance, we at Top Quote Life Insurance are here to help.
Whatever your current age or circumstances, we can guide you through the entire process of obtaining an insurance policy. If you need to change, renew, or cancel an existing policy, we can help with that, too.
We invite you to get in touch with us to discuss your personal needs and help make your family’s future more secure.