What Happens to Life Insurance When You Divorce?  What Every Couple Should Know

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How you’ll handle life insurance during a divorce or separation depends mainly on the type of life insurance. Here are the common types of life insurance policies you would have to deal with in Canada:

Term Life Insurance After Divorce

Term life insurance covers a specific period, usually 10, 20, or 30 years. If the insured person passes away during this term, the beneficiaries pay the death benefit. This type of insurance is generally less expensive but does not build cash value.

Permanent Life Insurance

Unlike term life insurance, permanent life insurance covers the insured’s entire lifetime as long as premiums are paid. This type of insurance often includes a cash value component that can be accessed during the insured’s lifetime.

Universal Life Insurance

Universal life insurance is a type of permanent life insurance that offers more flexibility. You can adjust the premiums and death benefits to suit your needs, and it also has an investment component that can grow over time.

Whole Life Insurance

Whole life insurance is another form of permanent life insurance. It offers a guaranteed death benefit and builds cash value, which can be borrowed against or cashed in during your lifetime.

Critical Illness Insurance

While not strictly a life insurance policy, critical illness insurance pays out a lump sum if you are diagnosed with a specific illness listed in the policy. This can be crucial during a divorce, especially if one party is financially dependent on the other.

Joint Life Insurance After Divorce

Joint life insurance covers two people, usually spouses, under one policy. This can be complex to handle during a divorce, as decisions need to be made about splitting the policy or having one party take over the premiums.

Understanding your life insurance type is the first step in making informed decisions during a divorce or separation. Consult with a team of Family Mediators and Certified Divorce Financial Analysts to navigate this complex issue effectively.

Court-ordered life Insurance Divorce

Courts may mandate one or both parties to maintain life insurance policies in many divorce settlements. This requirement ensures that financial obligations, such as spousal and child support, are secured even during the payer’s death. Here’s an overview of how court-ordered life insurance works and what you need to know:

Purpose of Court-Ordered Life Insurance

The primary purpose of court-ordered life insurance is to provide financial security for dependents. This type of insurance ensures that if the person responsible for making support payments dies, the surviving ex-spouse and children will still receive the necessary financial support. Courts typically order this when:

• Spousal Support: To guarantee continued financial support to the ex-spouse.
• Child Support: To secure ongoing child support payments until the children reach adulthood.

How It Works

1. Policy Purchase or Maintenance: The court may require the spouse responsible for support payments to either purchase a new life insurance policy or maintain an existing one. The court will specify the coverage amount needed to fulfill the financial obligations.
2. Beneficiary Designation: The court will order the supporting spouse to name the ex-spouse or children as the policy’s beneficiaries. This ensures that the benefits are directed to those who need financial support.
3. Proof of Policy: The supporting spouse may need to provide evidence of the policy, such as a copy of the policy document or a statement from the insurance company. This proof is typically submitted to both the court and the ex-spouse.
4. Policy Term and Coverage Amount: The court will determine the required duration and amount of coverage. This decision is based on the length of time the support payments are needed and the financial requirements of the beneficiaries.

Implementation and Compliance

Implementing court-ordered life insurance involves several steps:

• Selecting the Right Policy: The supporting spouse must choose a policy that meets the court’s requirements. This could be a term life insurance policy for a specified period or a permanent policy if longer-term coverage is needed.
• Premium Payments: The supporting spouse makes timely premium payments to keep the policy active. Failure to maintain the policy could result in legal consequences, including contempt of court.
• Policy Ownership and Beneficiary Rights: In some cases, the court might require the policy to be owned by the ex-spouse or establish an irrevocable beneficiary designation to prevent changes without the ex-spouse’s consent.

Challenges and Considerations

• Health and Insurability: Obtaining a new life insurance policy might be challenging or expensive if the supporting spouse has health issues. In such cases, maintaining an existing policy becomes crucial.
• Changing Circumstances: Life circumstances, such as remarriage or significant financial changes, can change. It is essential to review the life insurance requirements periodically to ensure they continue to meet the intended purpose.

Legal and Financial Advice

Given the complexities involved, seeking legal and financial advice when dealing with court-ordered life insurance is advisable. A Certified Divorce Financial Analyst (CDFA) or a family law attorney can provide guidance tailored to your situation, ensuring compliance with court orders while safeguarding financial interests.

Conclusion

By understanding the purpose, implementation process, and potential challenges of court-ordered life insurance, both parties can ensure that the financial support obligations are adequately met, providing a sense of empowerment and security for the future.

For more detailed guidance, consider consulting with legal professionals and financial advisors specializing in divorce settlements and life insurance matters.

Navigating the complexities of divorce can be challenging, especially when understanding your life insurance needs. Whether you’re considering term or permanent life insurance, it’s crucial to assess how much you need. Your life insurance beneficiary may change post-divorce, and you might find yourself getting new life insurance or modifying your existing policy’s cash value.

Critical illness insurance and universal life insurance are other options you may want to explore. Before buying life insurance, consult multiple insurance companies to get the best rates and coverage tailored to your new life circumstances. Your divorce agreement may stipulate maintaining life insurance to cover spousal and child support payments, so seeking financial advice is essential.

Use a life insurance calculator to gauge your life insurance premiums and ensure you have adequate coverage. Remember that your youngest child turning 18 could be a milestone that prompts a reassessment of your life insurance plan. Buying life insurance can financially protect your loved ones if something went wrong and you’re not adequately covered.

In summary, your life insurance needs will likely change following a divorce. It’s crucial to consult with a financial advisor and legal accounting professionals to make informed decisions. Please enable yourself to make these critical choices by staying informed and considering all your options.