Life insurance and divorce settlements
Term life insurance is one of the cheaper forms of life insurance.
Most group life insurance policies usually are term life insurance.
Divorce settlements usually stipulate life insurance coverage when there is a child and/or spouse obligations.
Whole life insurance may have higher premiums and applies throughout the lifetime of the policyholder.
When all is well and good during a marriage, spouses usually take on life insurance policies to protect their loved ones in case something terrible happens. Along the line, a divorce might be the reality, and it is possible to forget about the life insurance policy in the chaos of the divorce process.
This is a mistake, as a life insurance policy is very important during the divorce settlement process. If you have questions about what happens to a life insurance policy during a divorce or separation, read on.
Types of Life Insurance
How you’ll handle life insurance during a divorce or separation depends to a large extent on the type of life insurance in question.
Here are the common types of life insurance policies you would have to deal with in Canada:
Term Life Insurance
Term life insurance is one of the cheaper forms of life insurance because its premiums are usually low and affordable. The catch to this is that the policy only applies during a limited time period. This is usually between 10 to 20 years.
Some insurance companies let you choose the number of years you want the coverage to be active for. After choosing, then they’ll calculate the premium you have to pay. This premium amount is fixed for this period.
At the end of the policy period, the policyholder can either cash out the policy or renew it at a higher premium. The payout at the end of a term life insurance is paid to the beneficiary tax-free.
Group Life Insurance
Group life insurance is very common throughout Canada. If your spouse is working, it is very likely that he has group life insurance. This insurance coverage is usually done by your spouse’s employer to cover all employees in the company. It can also be done by a union.
Because the insurance plan is done by your spouse’s employer, your spouse may not need to pay any premium for this life insurance coverage. However, if your spouse wants more advanced coverage, he can elect to have a part of the premium deducted from his salary.
Most group life insurance policies are usually term life insurance. Your spouse would have been given a certificate of coverage to ensure that even if he leaves the company, he can resume the coverage at another insurer.
Whole Life Insurance
Whole life insurance is more advanced than any of the others already stated. It has a higher premium and applies throughout the lifetime of the policyholder.
During the course of a whole life insurance policy, your spouse can either cash it out or even borrow against it as an asset. Cashing out the whole life insurance policy is a very convenient option as due to the divorce, you might need a lump sum to pay for things like college for the child of the marriage.
Universal Life Insurance
Universal Life Insurance is very similar to whole life insurance policies. The major difference is that it requires more active participation on the part of the policyholder. This participation is in the form of choosing the investment vehicle that the cash value of the policy would be put in.
This type of life insurance is very useful for people who are investment savvy and want to take a more active part in the management of the policy.
Is life Insurance an Asset in Divorce
During a divorce, the assets of the couple are usually split evenly. However, this doesn’t apply to life insurance coverage. If there are children in the marriage, the court could order one of the spouses to pay alimony or child support.
As a result of this, the divorce settlement usually stipulates that there is life insurance coverage with the child or the receiving spouse as the beneficiary. This is in order to ensure that if the spouse paying alimony dies, there are still available funds to cover the divorce obligations.
If there is an existing life insurance policy before the divorce, it would have to be maintained after the divorce. If the supporting spouse doesn’t have life insurance coverage at the time of the divorce, he would need to get one in order to cover the divorce obligations.
Handling Pre-Divorce Life Insurance
If there is a pre-existing life insurance policy at the time of the divorce, there is a need to take an inventory of it. This is important as it would determine if it is enough to cover the divorce obligations like spousal support and child support.
This inventory is usually done by accounting for existing assets and liabilities in the marriage. The life insurance policy is also among the assets that should be tendered during the inventory process.
How the life insurance policy is handled depends on the type of life insurance policy in question. For instance, in a whole life insurance, you and your ex can either decide to keep the policy, or you can cash it out and use it to settle divorce obligations
Potential Life Insurance Issues
After the divorce settlement, there are some issues that could crop up with the life insurance policy and present some problems. Here are some of them and how to address them:
Policy Changes
If you’re not the owner of the insurance policy in question, your ex can change the beneficiary of the insurance policy. Your ex could also stop paying the premium on the insurance policy and it could expire. You won’t normally be notified of this by the insurance company because it has a contractual obligation to the owner of the policy, not you — the beneficiary.
You can mitigate this risk by using third-party authorization. This way, changes cannot be made to the insurance policy without the consent of the third party, and you can be notified if there are any changes to the policy.
A competent divorce lawyer can always help you set up the third-party authorization process.
Support Reallocation
It’s also very possible that the financial situation of parties changes after the divorce. For instance, your ex could lose his job, or you may earn more income than he does. This means that the divorce obligations have to be renegotiated, including the life insurance policy and its accessories.
This can be done through the courts, but it’s usually easier and faster to do this out of court. However, if renegotiating out of court, ensure that you have a lawyer with you to give a legal stamp of authority to the whole process.
Can child support impact Life Insurance coverage
The divorce obligations can change over time. For instance, if the amount for child support is $100,000 and your ex has already paid $50,000, a life insurance policy worth $100,000 would not be applicable.
In this case, the policyholder can either decide to cash out the insurance policy and pay the remaining balance, or he can add another beneficiary to get the other part of the insurance policy benefit.
Conclusion
Knowing which insurance policy would be ideal coverage for post-separation obligations, depends on your situation.
You don’t have to stumble through the process. With the right mediator, you can get a guiding hand through this difficult period. Ken Maynard is a Divorce Mediator and a Certified Divorce Financial Analyst and can provide the needed guidance.
Feel free to get in touch with him or call toll-free at 1.855.731.3500.
Are you having trouble reaching an agreement on your finances? Do you want to avoid going before the judge and asking for help? Consider working with a family mediator who can help you end your marriage in a way that is peaceful, cost-effective, and child-focused.
Would you like to learn more? Get in touch for a Get Acquainted Call to learn more about finding a separation agreement with a soft landing.
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