While it isn’t one of life’s happier events, many couples choose to divorce. Far from a mere parting of ways, disentangling your life from someone you have shared home and financial responsibility with requires diplomacy and reason. As high as your emotions may run right now, you need to make a reasonable plan to protect your finances.
One of the elements to consider is what happens with your life insurance policy. Will you keep your soon-to-be-ex as your primary beneficiary? What about blended families — how will you protect the children? Taking sensible action now prevents compounding the heartbreak if you or your partner die.
Changing Your Beneficiaries
Many people choose their spouse as their primary life insurance policy beneficiary, although you can also select a trust, estate, business or charity. If your divorce is acrimonious, your first instinct may be to remove them immediately. However, before you delight in calling your insurance company or march into HR to request new forms, consider your original intent in naming your partner.
People carry life insurance for many reasons. Maybe, like many, you chose your policy to protect the family home and cover your loved one’s living expenses if you die. If so, what will happen post-divorce if you continue to pay spousal or child support? Perhaps you don’t care if your ex ends up on the street, but do you want your children worrying about having a roof over their heads?
Maybe you think, “I’ll name my children as the primary beneficiaries.” Reconsider this approach if they are still in elementary or high school. The age of majority is 18 in most states, which means the proceeds go to a court-appointed legal guardian, even if your ex-spouse remains alive.
While your ex can petition the court to become the custodian of the funds, the added layer of bureaucracy and the time it takes to cut the red tape can result in severe economic hardship. Your children could go hungry while the courts delay getting them the money they need to live — funds they’d have in hand if you had kept your ex as the primary.
Covering All the Bases
The most effective way to handle life insurance post-divorce is to sit down with your ex and decide what you need. Are you part of a blended family where children who aren’t yours biologically nevertheless depend on your contribution? Perhaps your little ones are approaching adulthood, and you merely want to ensure they receive an inheritance or can return to the family homestead.
If your divorce is agreeable, you might want to protect your ex from homelessness if your alimony pays for their housing costs.
You can select from various policies. You have choices, such as mortgage protection insurance, that can come in handy during a split.
- Term life: As the name implies, term life covers you for a specified period, usually 20 years. This type of policy generally costs less and is a wise choice for making sure your kids have an inheritance or money for living expenses until they turn 18 or graduate from college. At the end of the term, you receive no payment if you remain alive, although some companies offer riders for a partial return of premium.
- Permanent life: This policy costs more, but it provides coverage until you die. It’s a smart choice for those seeking alternative ways to finance a child’s college education, as you can borrow against the principal.
- Mortgage protection insurance: While critics often decry this type of insurance, it comes in handy if you want to protect your spouse and kids from homelessness. The proceeds get paid directly to the lender so they can stay in the family home.
- Final expense insurance: This policy is bare-bones, but it often doesn’t require you to take a medical exam. It provides a modest sum, typically $10,000 to $20,000, to help with final expenses.
Communicate, Safeguard and Outline
As you divorce, you need to communicate with your spouse about financial matters. If your split is contentious, consider using a mediator to help with these conversations. Your ex should know what’s covered and what isn’t — you also need the same from them.
Make sure you specify where you safeguard your documents. Since you probably no longer reside with your partner, they need to know where they can find the contact information for your insurer if the worst occurs. It’s wise to get a safe deposit box to keep copies of all vital policy information and permit mutual access.
Be sure to outline what your final wishes are — especially if they’ve changed. While you can’t guarantee your ex will honor them to the letter, you do want to avoid them spending a bankroll on a headstone when you wanted a cremation and scattering of your ashes. They could then redirect those funds toward helping the children cope with the aftermath.
Know These Life Insurance Facts to Make the Wisest Decisions After Your Divorce
Divorce is a trying time, but you need to keep a sane head amid a sea of emotions when it comes to financial planning. Take the time to make the right life insurance decisions to safeguard your loved ones today.