Divorce and Your Life Insurance Policy

Divorce proceedings may force you to make many choices. Life insurance is one area that shouldn't be overlooked.

If you are considering a divorce, there are many alternatives with respect to your life insurance coverage. Consider the following to prevent unintended consequences from a financial and life insurance perspective.

Inform your insurance company
Notify your financial representative or insurance company about your changed circumstances as soon as possible.

Check your beneficiaries
An insurance company will pay the proceeds to your ex-spouse upon your death if named as beneficiary and you do not change it. Having instructions in a will or trust document directing the proceeds of a life insurance policy will not matter if the beneficiary designation is not correct. If a beneficiary designation simply reads "wife of the insured" or "husband of the insured" and there is no spouse, the contingent beneficiary (sometimes called "secondary") will receive the proceeds. In some states a divorce automatically changes your beneficiary designations (and your appointments of trustees, UTMA custodians, etc.) and possibly to someone you would not choose yourself.

Premium payments as alimony
Consult with your attorney to be sure that both the policy ownership arrangements and the insurance provisions of the property settlement agreement meet the requirements of the Internal Revenue Code. This is especially important if premium payments are to be classed as alimony for federal income tax purposes.

Divorce Decree Requirements
It is very important that any life insurance provisions in the decree be followed precisely. Life insurance may be required as part of a property settlement agreement or to guarantee the continuation of spousal or child support payments. Transfer of ownership of an existing policy, the purchase of a new policy by you or your ex-spouse on your life, or changing the beneficiary on existing policies you already own, may be part of the decree.

Community/Marital Property States
In these states the law may actually grant an ex-spouse more rights in a policy than he/she had during the marriage if the decree or settlement agreement does not specifically dispose of the policies. Terms of your divorce decree or property settlement agreement should specifically cover the ownership of your life insurance.

Joint Life Insurance Policies
A joint life policy (or survivorship policy) insures two people and pays out when the second insured dies. Some companies allow you to split the policy into two separate contracts, each insuring one spouse. While splitting the policy may trigger income tax, it may be worthwhile given the costs associated with purchasing new policies.

Using a Trust
Trusts are useful in helping a spouse manage money on behalf of children. A trust can be named the beneficiary of insurance proceeds. This allows a trustee to manage the proceeds and distributions.

To help ensure that after the divorce is final the financial end result is what you intended, talk with your network financial representative. Your representative can help you re(build) a solution for a financially secure future.