Effect of Divorce on Life Insurance
UPDATED: August 22, 2012
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Upon divorce, it is important to review the beneficiary designations on existing life insurance policies and make any necessary changes. This may depend upon the financial obligations between the parties, such as alimony, child support, and other financial issues that may be contained in the divorce settlement agreement or ordered by the court. Read further to learn of the effects of divorce on life insurance.
Effect of Divorce on Life Insurance Beneficiaries
Life insurance is a contract between a policy owner and an insurance company whereby the insurance company promises to pay money to the designated beneficiary upon the death of the insured. Although the policy owner is usually the insured, it is not a requirement. For example, a woman may purchase a life insurance policy on her own life, which makes her both the owner and the insured under the policy. The husband may purchase a life insurance policy on his wife's life, which would make the husband the policy owner and the wife the insured under the policy. The policy owner is the person who makes the insurance premium payments is the only person who can designate or change the beneficiary. Neither the insured nor the beneficiary can change the designated beneficiary.
If there are no children of the marriage and there are no financial obligations between the parties, then it is important to immediately designate a new beneficiary under the policy after a divorce. If the beneficiary is not changed, then the proceeds of the policy will go to the ex-spouse upon the insured’s death. Simply naming a beneficiary in one’s will does not change the beneficiary of any existing life insurance policies.
For example, a husband names his wife as the beneficiary under his life insurance policy. The couple subsequently divorce and the husband fails to change the named beneficiary under his life insurance policy. He remarries, makes a will, and designates the new spouse as the beneficiary under his will. Upon the husband’s death, the former spouse will receive all of the proceeds under the husband’s life insurance policy instead of his current wife.
Changing Beneficiaries After Divorce
The only way to avoid this scenario would be to change the beneficiary listed in the life insurance policy. If the policy owner cannot decide who to name as beneficiary of the policy, he can designate that the proceeds of the policy flow to the insured’s estate, in which case the proceeds will be distributed according to the insured’s will or by interstate succession if the insured dies without a will.
If there are financial obligations as part of the divorce settlement agreement, the beneficiaries should be designated according to the agreement. For example, if the agreement requires the husband to pay alimony to the wife, the husband may maintain a life insurance policy for the benefit of the wife that may be terminated upon certain conditions, such as the wife’s remarriage or until the obligation to pay alimony is otherwise terminated or modified. Another scenario may be that, under the agreement, the non-custodial parent is required to pay the mortgage payments on the marital home until the children reach the age of majority. The life insurance policy may designate that the proceeds pay off the mortgage on the marital home upon the insured’s death.
Protecting Children and Dependents
If there are children of the marriage, both parents should maintain a life insurance policy for the benefit of the children until they reach the age of majority. This ensures that the children’s needs will be met in the event of the death of either parent. If the non-custodial parent has any concerns that the custodial parent will not use the proceeds of the life insurance policy for the benefit of the children, a trust may be set up and a trusted friend, relative or institution named as the trustee. The trustee would be legally obligated to use the money in the children’s best interests.
If the agreement requires the ex-spouse to maintain a life insurance policy for the benefit of the spouse and/or children, it is important to monitor the policy to make sure it remains in force and the premiums are paid on time. If the insured spouse fails to keep the policy in force, the beneficiaries may have a claim against the estate of the insured for the amount of the proceeds they would have received in the policy had remained in force.