Life Insurance & Divorce: Everything You Need to Know

Whether your divorce is amicable or messy, you’ll find countless details need your attention. With so much going on, you may overlook life insurance. 

This is a big mistake. Forgetting about life insurance can cause negative consequences. Without proper planning, it can reopen old wounds years down the road.

In this guide, you’ll learn what you need to know about life insurance and divorce.

• What Happens to Life Insurance During a Divorce?
• How Should Life Insurance Change After Divorce?
• Managing Finances After Divorce
• Divorce and Life Insurance FAQs

It’s a good idea to occasionally review your life insurance policies. Learn when it’s essential and why. 

What Happens to Life Insurance During a Divorce?

In most cases, when you seek a divorce, there are court proceedings that involve dissolving the legal relationship, dividing property and assets, and determining issues related to child custody, child support, and spousal support.

What happens to life insurance during a divorce depends on several factors, including:

• Type of policy
• State divorce laws
• Your divorce settlement terms

Why does the type of life insurance policy matter?

• If you have a term life insurance policy that doesn’t accumulate cash value, there are no assets to split.
• If you have permanent life insurance that accumulates cash value over time, that’s legally considered a financial asset. During your divorce, you and your ex will need to reach an agreement on how to split the policy’s cash value.

There are situations when even a term life insurance policy can be caught up in divorce proceedings. For example, if your divorce requires you to provide child support, the settlement may require you to get life insurance and list your ex as a beneficiary. We’ll dig into this more later.

Understanding How Cash Value Works

If you buy a permanent life insurance policy, it may have a savings component called a cash value account. The account total is your money. At any point, as the policy owner, you can cash out (or surrender) the policy and receive the surrender value. (Note: Your beneficiaries will not receive the death benefit if you do this.)

This cash value is included in your net worth, making it an asset included during divorce proceedings. In many cases, spouses choose to surrender the policy and split the cash value.

How Should Your Life Insurance Change After Divorce?

After your divorce is finalized, there are two questions to ask yourself:

1. Do I need a new life insurance policy?
2. Do I need to change beneficiaries on my current life insurance policy?

Post-divorce, your life will look much different than it was before.

• If you currently have life insurance, you may need to change it. 
• You may not even need life insurance anymore.
• If you don’t have life insurance, you may be required to get it.

Protecting Alimony or Child Support Payments

While the division of marital assets during a divorce is typically equal, the court may require one spouse to make monthly alimony or child support payments to the other. These payments ensure the children are cared for and the dependent spouse receives appropriate compensation after the divorce.

When there is a child support or alimony obligation, the court usually mandates that the payor has life insurance. If they already have life insurance through work, also called group life insurance, their opposing attorney may require them to keep it.

If a policy is not already in place, the paying spouse may have to get life insurance to ensure financial support continues if they pass away.

Guidelines regarding life insurance to protect alimony or child support payments include:

• Term life insurance is typically the best option.
• The policy must last until children are financially independent.
• You can petition for ownership if you don’t trust your ex to keep the policy active.
• You can request access to policy notifications so you know if the policy lapses.

It’s imperative to have defined clear terms and responsibilities. It could be detrimental to the beneficiaries if the premiums are not paid.

Reviewing Your Beneficiaries

In some divorce cases, a court may order you to name your ex-spouse as an irrevocable beneficiary on your life insurance policy if they rely on you for child support. Having an irrevocable beneficiary means you can’t change the policy without their consent.

If you already own life insurance and no restrictions have been placed, you’re free to change the beneficiaries of your policy by submitting a beneficiary change form to your insurance carrier. We recommend submitting the paperwork for a beneficiary change immediately after your divorce is finalized.

This is a critical step because:

• If your ex stays on your policy, they have a legal claim to your payout. This can start a bitter dispute for your family and stall the policy payout when it’s needed most.

• If you don’t want anything left to your ex, make the proper changes to your group life insurance and 401(k) plan.
• Any plans through your employer are subject to the Employee Retirement Income Security Act (ERISA), which trumps state laws.

Note: Some states have laws automatically revoking an ex-spouse as a beneficiary. If you want to leave an ex-spouse as your beneficiary, you should complete a revised beneficiary designation form, listing your ex-spouse as the beneficiary again after the divorce is final.

How Does Naming a Minor as a Beneficiary Work?

Your first instinct after getting divorced may be to change the beneficiary from your ex-spouse to your children. Don’t do this if your children are still minors under 18.

If you name your child beneficiary to your policy and they’re not yet legal adults when you die, the court appoints a guardian to manage these funds until they reach legal age. This court process requires attorney fees, court proceedings, and court supervision of life insurance benefits – all of which take time and money.

A better solution is to use a trust. You can leave life insurance benefits to your minor children, but the rules are different.

Managing Finances After Divorce

Post-divorce finance management can be stressful. Seeking out knowledge and taking the time to make a plan will help stabilize your life and guide you to financial success.

Divorce court resolves many monetary matters, but there are some additional steps you can take now.

In addition to life insurance, there are a few key elements to consider when managing your finances post-divorce:

• Shared Accounts
• Paying Off Debt
• Social Security

Shared Accounts

As long as there are no temporary restraining orders on shared finances, closing any joint accounts is a good idea.

• Creditors can access all account funds to settle debts owed by either party. While you may pay all your bills on time, if your ex doesn’t, creditors can still benefit from your shared savings.
• With shared savings accounts, both parties have equal access to the funds. Unfortunately, a vindictive ex-spouse could drain the account, and since the money technically belongs to them as well, it may be difficult for you to recover any of the funds.

The best way to avoid problems is to close the account and divide the assets.

Linking your credit with another person’s credit always has pros and cons. Sharing responsibility for bills and helping build credit are benefits of joint credit accounts, but the downside comes when there is a disagreement between the two account holders.

Your ex-spouse may run up the balance on a shared account and refuse to pay. Taking them to court equals more expenses, so it’s best to close the joint credit account quickly before issues occur. If there is still a balance owed, contact the credit card company and change the account status so that no additional charges can be made. That gives you peace of mind knowing no mischief can occur while you figure out a payment plan.

If you’ve had the joint credit account for several years, closing it may negatively impact your credit. You’re entitled to a free copy of your credit report every year, so take advantage of this and check yours post-divorce.

If you were relying on the joint account as your primary source of credit, it’s essential to start building your credit history.

Paying Off Debt

In the event of a divorce, contact your creditors if you have problems paying bills on time. Divorce can cause financial strain, and some credit card companies may be willing to work with consumers experiencing hardship and lower their payments temporarily.

A big step to start paying debt is to create a budget. Start by listing your assets and expenses.

The post-divorce list will look very different from your budget during your marriage. You previously had two incomes and split costs like rent and energy bills. Review your list and see where you can make cuts.

If your split is amicable, navigating remaining debt and bills can be simple. However, finances and debt management after divorce is often messy.

What to know about paying off debt after a divorce:

• Be honest with creditors and record phone conversations or keep a log of when you called, who you spoke to, and any promises made by the company.
• Creditors can come after your assets if your ex doesn’t pay their half of the co-signed debt.
• If you and your ex can’t agree on a fair payment plan, you may need to work with an attorney.

Social Security

If you were married for ten years or longer, you’d be eligible to collect Social Security benefits based on your ex-spouse’s earning record when you reach retirement age—if you are not remarried to someone else.

Whether your ex remarries doesn’t affect your benefits.

If you remarry, you can’t collect benefits on your former spouse unless your later marriage ends by annulment, divorce, or death.

At retirement age, you could choose to collect on either spouse (assuming both lasted at least ten years), but you can’t collect on both.

If you haven’t been planning for retirement, previously relying on your spouse’s retirement plan to provide for you, it’s time to start planning ASAP. You may have received a share of your ex-spouse’s retirement funds in your divorce settlement, but this may not be enough. Work with a financial planner to determine how much you may need to enjoy your retirement years.

Getting remarried? Learn why life insurance is important when you remarry.

Divorce and Life Insurance FAQs

No one gets married expecting to get divorced. But it happens. Everyone’s situation is different, but here are some frequently asked questions answered.

Are Life Insurance Policies Marital Property?

Life insurance policies are not marital assets, but their proceeds may be in certain situations.

If the policy was purchased before the marriage and the owner did not change the beneficiary designation to include their spouse, it’s not subject to divorce proceedings.

If it was acquired during the marriage and paid using marital funds, it might be subject to division in the event of a divorce.

Additionally, if the beneficiary designation changes to include the spouse during the marriage, the proceeds may be considered marital property.

Those living in community-property states have varying marital asset laws.

Can an Ex-Spouse Collect Life Insurance?

Yes, if you want to keep your ex-spouse as the beneficiary of your life insurance policy, you can. 

But if you don’t want your ex-spouse to collect, there will be issues if you forget to remove them as a beneficiary and your state doesn’t automatically revoke ex-spouses from life insurance policies.

Unfortunately, this situation happens more often than you may think. A couple gets divorced, forgets to change the life insurance beneficiary, remarries, and eventually dies. In their time of grief, the surviving spouse has to go to court to fight for the proceeds that are technically owed to an ex-spouse.

Review your life insurance policies annually to ensure they align with your financial goals, needs, and wishes.

Can I Get Life Insurance on My Ex-Spouse?

If you have an insurable interest in your ex-spouse (for example, if they pay you child support), you can buy life insurance on them with their consent.

What Is Court-Ordered Life Insurance?

Court-ordered life insurance is a policy you must get by a court order. Typically, it’s ordered as part of a divorce settlement or a child support agreement and is designed to provide financial protection to your children if you pass. The policy may require you to name your ex-spouse as a beneficiary, and the court may specify the coverage amount.

Learn more about the different ways life insurance for families is beneficial. 

Talk to a Quotacy Agent About Your Policy Needs

If you need a new life insurance policy, we can help. We work with over 25 of the nation’s top life insurance companies and can help you secure term or permanent life insurance. If you’re court-ordered and need a policy quickly, we also have some instant coverage options.

Start the process by getting an instant term life insurance quote. Or you can contact us directly for assistance.

Need help determining how much life insurance you need in this new stage of life? Try our life insurance calculator. Answer a handful of questions and learn how much coverage you need.

No matter where you are in your divorce process, we’d be happy to help you make the best transition possible.

This article was written for educational purposes and is not legal advice. To be certain about your state’s divorce laws and their impact on your specific circumstances, it’s essential to consult with a qualified attorney who can provide you with guidance based on the laws in your jurisdiction.