Divorce, both emotionally traumatic and physically exhausting, is a life event in which finances – including life insurance – are almost always dramatically altered.
You essentially are splitting your assets, but potentially doubling your expense footprint. You are now maintaining two households with the same amount of assets you spent a lifetime building. It can be devastating,” says Haleh Moddasser, CPA, Stearns Financial Group
Life insurance is frequently court-ordered, or mandated, during divorce proceedings. And, minding those kinds of financial details now can prevent monetary headaches in the future.
Goal – Learn the 9 common life insurance mistakes made during divorce and how to avoid them.
Mistake #1: You ignore your mandate to buy life insurance.
If you received a court-ordered life insurance mandate, take it seriously. In essence, you are legally required to purchase life insurance, often as a result of divorce proceedings.
Should you ignore the requirement, your legal woes will only continue. While laws vary by state, it’s common for a spouse to be entitled to your estate if you don’t have appropriate life insurance in place.
Why is life insurance court-ordered in divorce?
Life insurance provides financial protection. If an ex-spouse relies on you for child-support and/or alimony, and something happens to you, it could be monetarily devastating. Your life insurance policy safeguards their finances.
In other words, during divorce proceedings, courts will often order life insurance to be purchased to protect child support and alimony payments.
2. Policy Type
Mistake #2: You purchase a life insurance policy that isn’t a good fit for your needs.
Life insurance comes in different flavors. You will want to be familiar with the different types to know which will be the best option for your life insurance mandate.
Let’s examine the two most common types of life insurance:
Term life insurance provides coverage for a specific term, or set amount of time.
Term life insurance is consistently purchased during a divorce decree.
Here’s why – Term is a cost-effective way to secure a large amount of financial protection for a specific period of time – and therefore, is likely an excellent fit for meeting your court-mandated requirement.
Key components of term life insurance:
- Common term lengths include: 10, 15, 20, 25, and 30 years
- Cost effective
- Premium payments and death benefit are almost always level, meaning they do not change
- Riders – additional benefits to your policy – are usually available
Consider an example:
You are finalizing your divorce and have been ordered to pay child support. Your two children are 9 and 12 years old. You purchase a term life insurance policy that lasts 10 years will provide financial protection until your youngest child finishes high school.
Whole life insurance provides coverage for your whole life, or permanently.
Whole life insurance is rarely purchased during a divorce decree.
Here’s why – Whole life insurance provides financial protection that does not end. It’s uncommon for court-mandated life insurance to be required to last indefinitely. Unless the court finds a continuous need (this is rare) for financial protection, whole life would not be a good fit.
Key components of whole life insurance:
- Policy lasts your whole life and does not expire
- More expensive than term life insurance
- Often, premium payments are level
- Cash-value element to your policy
Note: other forms of permanent life insurance also exist, but are not typically used during court-ordered life insurance:
- Universal life insurance – whole life insurance with flexible premium payments (by accessing cash-value of policy)
- Variable life insurance – whole life insurance with an investment component
- Variable Universal life insurance – whole life insurance with flexible premium payments and an investment component
3. Face Amount
Mistake #3: The face amount of your policy doesn’t match up with your financial requirements.
Divorce proceedings create specific financial requirements. For example, it’s common for an ex-spouse to be mandated to pay the custodial parent child support (and sometimes alimony).
Important – Always seek legal counsel with any questions or concerns you may have.
Be sure to purchase an amount of life insurance that matches the monetary needs created during your divorce.
Let’s consider a few examples:
You have a 12 month old child with your ex-spouse. Your ex-spouse works part-time, earning $25,000 annually. You are the primary source of income and earn $75,000 annually. The divorce court mandates you to purchase life insurance in order to protect your child support payments.
You purchase 20 year term life insurance policy for $750,000 – an amount that is 10 times your annual income. The 20 year term means your coverage will last until your child is 21 years old.
You have 4 children with your ex-spouse, ages 6, 10, 11, and 16. Your ex-spouse does not work (stay-at-home parent), and will be the custodial parent. Your annual income is $200,000. During the divorce proceedings, you receive a court-order for life insurance to cover child support and spousal maintenance (alimony).
You purchase a 15 year term life insurance policy for $2,000,000. Your life insurance policy will last until your youngest child is 21 years old. And, your policy is for an amount that will cover your court-ordered financial obligations.
You have 2 children with your ex-spouse, ages 11 and 15. Your ex-spouse is disabled and unable to work due to a chronic health condition. You are the sole source of income and earn $100,000 annually. During the divorce proceedings, you receive a court order to provide child support and permanent spousal maintenance (alimony) – due to the fact that your ex-spouse is unable to work.
You decide to purchase two separate policies. First, you secure a term life insurance policy to protect the financial welfare of your children. Your term policy is for 10 years and for $1,000,000 – 10 times the amount of your annual income. Second, you purchase a modest permanent life insurance policy for $100,000 to protect your spousal maintenance payments.
Remember – Each divorce proceeding is different. And, laws vary by state. You will need to collaborate with your lawyer to understand your specific court-ordered life insurance requirements.
4. Contract Parties
Mistake #4: You forget to inspect the fine print on your life insurance contract.
Particularly during divorce, pay close attention to the details of your life insurance policy – especially the parties to the contract.
The primary parties to a life insurance contract are:
- Owner – The owner has the capability to potentially cancel the policy or change the beneficiaries. Often, it’s recommended that one of two things happens to ensure the intent of the life insurance policy stays intact:
- The owner of the policy is the custodial parent (recipient of child support and/or spousal maintenance)
- The custodial parent is listed on the policy to be notified if a premium payment is missed. That way, steps can be taken to make sure the policy stays in force.
- Insured – This person has their life insured by the contract. For court-ordered life insurance, it’s typically the non-custodial parent.
- Beneficiary – The recipient(s) of the death benefit. Court-ordered life insurance beneficiaries are typically the ex-spouse (the custodial parent).
- Insurer – The life insurance company providing the contract.
Bottom line – Pay close attention to how you set up your life insurance contract. It’s regularly recommended that the owner and beneficiary of the contract be the ex-spouse (custodial parent).
5. Legal Advice
Mistake #5: Your lawyer isn’t consulted about your life insurance policy.
As you likely know, divorce proceedings are usually written in legalese – both confusing and lengthy. Court-mandated life insurance clauses are likely no exception.
Be sure to seek legal advice concerning your mandate should you have any questions about your specific requirements. If you’re committed to go through the efforts of securing life insurance, you’ll want to make sure you’re checking all the boxes.
Specifically, be sure to clarify with a legal expert on what your court-order must cover:
- Child support
- Spousal maintenance
- Other legal requirements
- Type and fact amount of life insurance needed
6. What Ifs
Mistake #6: Possible scenarios and pitfalls are not accounted for.
Divorce is often uncharted territory. Be knowledgeable on the potential issues that could arise surrounding your life insurance policy.
Let’s take a look at some frequently asked questions for court-ordered life insurance:
Can my ex-spouse change the beneficiary on the life insurance policy?
Possibly. The owner of the life insurance policy, unless a contractual stipulation exists (i.e. irrevocable beneficiary), has the ability to alter the policy, including beneficiaries. Takeaway: Inspect the fine print of the life insurance policy.
Can I cancel my life insurance policy, specifically for spousal maintenance, if my ex-spouse remarries?
Sometimes. Likely, you can refer back to the original divorce settlement for clarification. Divorce judgements often cover specifics as to situations in which spousal maintenance can end. Takeaway: Circumstances in which spousal maintenance, and the corresponding court-ordered life insurance, can end are usually established during the divorce proceedings.
Can I cancel my life insurance policy when my youngest child turns 18?
State requirements vary. For example, some states require your child support to last until the, “age of majority” – 18 years. Other states require child support to last until age 21. Still, others keep child support active through college enrollment. Takeaway: Be sure to know your state’s age requirements for child support.
Can I require my ex-spouse to make the premium payments on my court-mandated life insurance?
In a word, no. Almost always, the recipient of the court-ordered life insurance will also be the payor of the policy.
My ex-spouse had a baby with a new partner. Is this new child entitled to be a beneficiary of my life insurance policy?
No. Only beneficiaries (i.e. your children) listed on the life insurance policy receive the death benefit.
Can my ex-spouse require I purchase life insurance if our divorce is already final?
If your divorce proceedings are finalized, and court-ordered life insurance was not established, your ex-spouse cannot require you to purchase life insurance – unless, legally, it is proven there is a financial need that did not exist during the original proceedings. Takeaway: Your ex-spouse would need to prove an insurable interest post-divorce.
Keep in mind – State laws differ. Your circumstances are unique and you should always seek legal counsel for concerns or questions.
7. No Physical
Mistake #7: You undergo a tedious medical exam when you could have skipped it.
Often, a divorce decree requires you to provide proof of life insurance quickly.
No physical term life insurance is often an excellent fit for court-ordered life insurance.
Here’s why – No physical (also called non med or no exam) life insurance is purchased quickly, the rates are competitive, and you are able to avoid the physical examination:
- It’s quick – Medical underwriting usually adds weeks to your life insurance policy. By purchasing life insurance without a physically, you can have you policy issued in a fraction of the amount of time. Some policies can be issued the same day.
- Price is right – The cost of no physical life insurance has come down – a lot. Frequently, premiums are similar to fully underwritten (medical exam) policies.
- Skip the physical – For many, the idea of undergoing a medical exam is cringeworthy. It’s possible to skip the needles, nurses and liquid samples and purchase a high-quality policy.
8. Existing Policy
Mistake #8: You don’t update your existing life insurance contract.
You may have purchased a life insurance policy prior to your divorce. Or, it’s possible your employer provides life insurance coverage.
You’ll want to reevaluate your preexisting policies while going through a divorce. If you own a life insurance policy separate from your court-ordered life insurance:
- Consider changing the beneficiaries so that they match your current needs
- Assess your current finances to verify your life insurance products still make sense
9. Independent Agent
Mistake #9: You purchase a policy before knowing all of your options.
Above all, collaborate with an independent life insurance agent (that’s us) before you make a court-ordered life insurance purchase. You’ll want an expert on your side to verify that you’re purchasing the best policy at the best price – that meets your legal requirements.
Independent agents are not held captive to a particular life insurance carrier and can shop the top-rated companies to find the ideal policy to fit your needs.
Plan on the following two things in order to purchase affordable court-ordered life insurance for your divorce:
- Partner Up – Partnering with an independent agent verifies that all of your life insurance options are explored. You will have an expert on your side, navigating through the requirements of your court-order.
- Prep – Be ready to apply for life insurance. This means your important information, especially your court-ordered clause, is readily available. Be ready to communicate beneficiary information. Additionally, jot down your medical history, occupation information, and any lifestyle information that would affect underwriting.
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