Guide for Life Insurance and Divorce/Settlement

When it comes to divorce, life insurance is an important topic to discuss. It’s especially important if children are involved, because it can provide years of financial security for the children as well as one or both spouses. The process of navigating a pre-existing life insurance policy during a divorce does require some effort, as a number of decisions need to be made, including who the beneficiaries will be going forward, who will be responsible for paying for the policy, and whether or not there is cash value if applicable. Keep in mind that any policies you purchased during your marriage could be considered marital property and may be subject to distribution.

In this article:

• Life Insurance Policy After a Divorce Overview 
  • Updating your Beneficiaries
  • Accounting for the Cash Value
  • Should Insurance be Included in Your Divorce Settlement?
  • After a Divorce, Who Pays the Life Insurance Premiums?
• Single Life vs. Joint Life Insurance Following a Divorce 
• Simplifying the Split 
  • Term Life Insurance 
  • Whole Life Insurance
• During a Divorce, How is the Cash Value of a Life Insurance Policy Divided?
• Should you Purchase Life Insurance on your Ex-Spouse?
• Life Insurance for Single Parents
• Life Insurance After a Divorce 
• Frequently Asked Questions (FAQs) about life insurance and divorce or settlement

Life Insurance Policy After a Divorce Overview

Oftentimes, there aren’t many reasons to keep your ex-spouse as a beneficiary. Especially if there are no children involved. One option you can choose to do with your life insurance policy is to cash out the policy and divide the proceeds with your ex if it has a cash value. On the other hand, maintaining a life insurance policy on the other ex-spouse can be a smart option if there are children and one spouse obtains primary custody and alimony or child support. The benefit should be sufficient to replace this income till the children are no longer minors should that ex-spouse pass away.

If you have children, life insurance is definitely one of the numerous financial factors you need to take into account while evaluating your marital assets and finances during a divorce.

There are several options for life insurance during a divorce:

• Policies can be kept in force voluntarily to provide financial protection for children or a spouse.
• Policies can be cashed out, and the cash value, if deemed a marital asset, can be divided equally between both spouses.
• If the courts order it, a policy may be required to remain in effect as part of a settlement. It can be included in alimony or child support.
• A new policy may be issued to replace an existing policy because it better meets the needs of both parties in the future. A whole life policy, for example, may be replaced with a term policy because coverage is only required for a limited time, typically until children reach the age of 18 or 21.

Updating your Beneficiaries

The main purpose of life insurance is to protect your loved ones from financial ruin in the event of your death and loss of income. The majority of married individuals with life insurance designate their spouse as the primary beneficiary. Having your spouse as your beneficiary guarantees that they will be able to continue to put food on the table, pay the mortgage or rent, and raise the children without your income. Life insurance is especially important if you are the primary source of income for your family.

In the event of a divorce, you may no longer wish for your ex-spouse to profit from your death. If there are no children involved, there are very few reasons to keep an ex-spouse as your life insurance beneficiary.

The majority of life insurance policies are revocable, allowing the policyholder to alter the beneficiary at any time. However, some individuals designate irrevocable beneficiaries, in which case the beneficiary cannot be changed once designated. The simplest way to change your beneficiary following a divorce is to contact your life insurance agent so they can verify the new beneficiary.

Accounting for the Cash Value

Some life insurance policies build up cash value over time, particularly whole life and universal life policies. A portion of the premium payment you make each month goes into a fund that accumulates interest. The policy’s cash value is represented by the fund’s balance. It’s your money here. You have the option to take the cash value of the policy instead of the death benefit at any time while it is still in effect. Your life insurance policy is being cashed out during this procedure.

A portion of your joint net worth is represented by the cash value of your life insurance policy. The best course of action is to include the life insurance policy, along with its cash value, on the list of marital property that needs to be divided. This indicates that each spouse will separate from the other with half of the policy’s cash value in an equitable divorce.

Should Insurance be Included in Your Divorce Settlement?

Life insurance is an important part of financial planning for families and it should also be considered when you divorce. If you rely on your ex’s support payments, you need to consider how you would deal if they died and the payments ended.

Consider this: Did you know that if you’re the one making the payments, your obligations don’t usually end when you die? Furthermore, your estate could be tied up for a long time if no provisions are made to cover future support payments. As such, you should determine that the ex-spouse making the payments has a life insurance policy in which the other is named as the beneficiary to cover spousal and/or child support in the separation agreement. Also consider arranging for the beneficiary designation to be signed at the same time as the separation agreement to ensure that it is completed. Make it irrevocable to ensure that the beneficiary cannot be changed later. Seek independent legal advice to ensure that everything is handled correctly.

After a Divorce, Who Pays the Life Insurance Premiums?

If you are granted primary custody of the children and cannot rely on your ex-spouse financially, you may want to purchase the policy and pay the premium. The policy will lapse and coverage will be lost if premiums are not paid. If your ex-spouse is no longer in the picture and you are raising children on your own, you still need life insurance and can take out a policy and pay the premiums on your own.

Single Life vs. Joint Life Insurance Following a Divorce 

Single Life Insurance 

In the event of a divorce, having two separate life insurance policies or a single life insurance policy should make things a little easier. To make sure your policy still offers the financial protection you need given your altered circumstances, you should check. If you no longer want your ex-spouse to receive a life insurance payout, you might want to think about changing a beneficiary before, during, or after the divorce.

Joint Life Insurance 

It might be possible to divide your joint life insurance into two policies in cases of joint insurance policies. However, not all insurance companies offer this choice. Here are some of the options you have if your insurer won’t let you separate the two policies:

1. Take over the existing policy. If either of you still needs life insurance, one of you takes over the existing policy while the other arranges a new one for themselves. To see if this is a choice, consult your policy manual or an advisor.

1. Cancel the joint policy and apply for a new single policy. You cancel the policy and obtain a new single life insurance policy that is appropriate for your new circumstances. It’s important to keep in mind that there could be drawbacks to doing this. Given that you will be older than you were when you first purchased the policy, premiums are likely to increase, and you may need to undergo health checks before a new policy is approved. Before terminating any existing coverage, you might want to make sure your new policy is in effect. Finally, the terms and conditions in effect at the time you make the change will apply to any new policy.

Simplifying the Split 

Any policies you purchased during your marriage could be considered marital property and may be subject to distribution. A policy such as a term life policy is one of the simplest coverages available while going through divorce and settling. On the other hand, a policy like whole life insurance can make things more complicated. 

Term Life Insurance

Whether you can split life insurance with your ex depends on your term or permanent policy. Term life insurance covers temporary financial needs with a 10- to 30-year death benefit. If you died within that time frame, your beneficiaries would get the policy’s face value. Policyholders usually choose a term that ends after their major expenses are over, like when the kids move out or the mortgage is paid off. As for the death benefit, buy 10 to 15 times your annual income, depending on your needs. Term life insurance has no cash value while you’re alive, so it’s not considered a marital asset during divorce. The death benefit would be considered separate property.

Whole Life Insurance

Permanent policies such as whole life and universal don’t expire as long as the policyholder pays the premiums. The cash value in these policies could be considered a marital asset and may need to be split. Since a life insurance policy can’t be split, both parties can negotiate the cash value in exchange for another asset. If you want to split your shared permanent policy, you must cash it out and divide the proceeds or use the cash payout for legal fees or joint debts. Permanent policies are expensive to maintain, so many choose temporary coverage.

During a Divorce, How is the Cash Value of a Life Insurance Policy Divided?

Many life insurance policies accrue cash value over the course of the policy’s term. This is particularly true for whole life and universal life insurance policies. When you make a premium payment, a portion of that payment is invested in a fund, which grows in value and becomes the cash value of the policy. It is your money, and you can access it at any time rather than having it used to pay the death benefit associated with your life insurance policy.

The cash value of an insurance policy is considered part of your estate and is usually treated as a marital asset. This means that you and your spouse will be entitled to a portion of the policy’s cash value. Several factors will influence how that split occurs.

• If you live in a community property province or territory, you both have a right to half of the cash value.
• If you live in a province or territory with equitable distribution, you are both entitled to a portion of the proceeds. However, because equitable distribution provinces and territories use a different set of factors, you may receive either more than or less than 50% of the proceeds.
• Another possibility is that a settlement includes one spouse giving up a larger share of the cash value in exchange for receiving a larger share of another marital asset. This could be a real estate investment, a retirement account, or other real estate. In fact, depending on how a settlement is structured, you could receive either 100 percent of the cash proceeds or none at all.
• In some cases, the courts may order a spouse to continue carrying life insurance as a form of protection for the spouse and children in a marriage. In this case, the cash proceeds may be kept intact to ensure adequate insurance in the future.

Should you Purchase Life Insurance on your Ex-Spouse?

If you plan to rely on your ex-spouse for financial support in the future, it’s a good idea to request that they keep a life insurance policy as part of your divorce agreement and name you as a beneficiary. If you want to manage the policy, you can take out a policy on your ex-spouse as long as they agree to take a medical exam and sign the policy. This eliminates the possibility of missed premium payments or policy changes occurring without your knowledge.

A judge ultimately decides whether or not life insurance can be included in your divorce agreement. Consult with your attorney to determine whether this is the best option for your financial situation and divorce case.

Consider the following reasons to include life insurance in a divorce agreement:

• To safeguard the alimony payments you will receive
• To safeguard the child support payments you will receive
• To safeguard the pension or retirement funds you will receive

Life Insurance for Single Parents

One of the most difficult aspects of divorce is that it frequently results in people becoming single parents. Unfortunately, many parents discover that they cannot rely on their ex-spouses. In these cases, divorced people become the sole caregivers for their children. You must have a plan in place in case this happens.

Your children have nothing if you pass away because your ex-spouse is no longer involved and you are the only source of financial support for them. Without your income, your children would not be able to take care of their basic needs like food and clothing, let alone anything more. Your children will be taken care of by a guardian, either a family member or someone chosen by the court. 

You must obtain sufficient life insurance on yourself if divorce makes you a single parent in order to safeguard your kids or other dependents. You can estimate this amount by using a simple calculation:

1. Calculate the number of years left until your youngest child turns 18 and if you want to be extra safe, 21. 
2. Multiply that number by your annual income to get the minimum benefit amount. 

For example, if you make $60,000 per year and your youngest child is 6, a death benefit of $720,000 will replace your income until that child is 18. A $900,000 benefit would see the child through until the age of 21. 

Life Insurance After a Divorce 

It’s important to make sure you buy enough coverage when buying life insurance after a divorce to safeguard the people you would leave behind if you passed away. We advise buying life insurance that is at least 10 to 15 times your annual income, but your coverage should cover all of your debts, such as:

Childcare: Up until the age of 18, raising a child can cost as much as $250,000. Their daily needs or educational costs may be supported by the death benefit.

Dependents: Take into account the ongoing care of any aging parents or family members for whom you are responsible when making plans.

Income replacement: Your economic contributions will need to be taken into account if you pass away, regardless of whether you provide an income or provide services around the house.

End of life expenses: Funeral services can run upwards of $10,000 in terms of final costs. Your family won’t have to use their savings or incur debt to pay for those expenses if you leave them none.

For a more in depth look at how much insurance you should get, check out our full guide here on understanding how much insurance you need.

Frequently Asked Questions (FAQs) about Life Insurance for Divorce/Settlement

Find a solution for what you’re looking for

Life Insurance after divorce and while settling can seem daunting. If you’re going through a divorce, Protect Your Wealth will help you identify and find the coverage you need to create financial stability for you and your children after a divorce or while settling.

To schedule a consultation about your income protection goals, or if you have any questions about insurance in Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta including areas such as Aurora, Oakville, Lethbridge, and Burnaby.