Insurance in divorce: What you need to know

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If you are facing a divorce, you have a lot of decisions to make around your family, finances, and protecting your future. One critical component of your divorce agreement that is easy to overlook is the issue of insurance:

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Life insurance and divorce

Is life insurance a marital asset? An asset is often referred to as an item of value that may generate a monetary benefit, such as a stock, bond, antique car, or jewelry. A marital asset is an asset that is owned jointly by a married couple that must be divided if the couple gets divorced. Depending on the type of policy, life insurance may or may not be considered a marital asset.

There are two types of life insurance: term and permanent. Term life insurance has no cash value and simply pays out a tax-free death benefit to a named beneficiary upon the passing of the insured person. This means that until and unless the insured person passes away, there is no financial value in the policy. As such, term policies will not be considered a financial asset subject to division in divorce.

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However, a permanent insurance policy may be considered an asset if it has financial value or has accumulated a cash balance called “cash value.” Cash value is built up inside the policy through interest or investments and may be used to pay the policy’s premiums, security for a loan against the policy, or if the funds are withdrawn. Due to its monetary value, a permanent policy with cash value will be treated as an asset and even if the policy is owned by only one spouse, it can be considered a marital asset if it was procured during the course of the marriage.

There are three main reasons to ask for life insurance to be included in a divorce agreement:

1. To protect the alimony payments that the husband or wife is expecting to receive;

2. To protect the child support payments that children depend on; or

3. To protect pension or retirement funds that a spouse is entitled to receive based on a former spouse’s work record.

Who pays the insurance premiums during the divorce process? It depends. If the policy does not exist at the time of divorce and you are requesting that one be obtained, then you may have to pay for it. However, if the insurance policy is already in place then it is possible to have the spouse who is currently paying for it continue to pay. To ensure that the policy does not lapse for failure to pay the premium, some people choose to pay the premiums themselves.

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Should you buy life insurance on your former spouse?

If you expect to depend on your ex-spouse for financial support in the future, it makes sense for you to purchase a life insurance policy and name yourself or a trust for your benefit, as a beneficiary. The cost will depend on the age, health, and death benefit of the insured person.

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Can you change the beneficiary of your life insurance policy?

Yes, but only once the divorce is final. When the divorce is over be sure to review the list of beneficiaries in your existing policies. Most families who buy life insurance name their spouse as the primary beneficiary so that when they die, their partner has funds to pay off debts, raise the children, and pay for college.

However, after divorce, you may wish to change who will receive the proceeds of your policy when you die (the death benefit), or name a trust if your children are too young to manage money responsibly.

In most cases, only the policy owner can change a policy’s beneficiaries. If your ex owns the policy, you may request that they change the beneficiary but it is entirely up to them to do it. If your former spouse owns the policy, they can change or cancel the policy without your knowledge or permission.

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Can you stay on an ex-spouse’s life insurance policy?

If your ex-spouse took out a life insurance policy that insures you and pays out a death benefit to them in the event of your death, they can keep that policy even after your divorce. This is because only the policyholder can cancel or change a life insurance policy. You may remain as a beneficiary on their policy but they can remove you if they choose.

Most divorce agreements require that an ex-spouse be named as a beneficiary on the policy for so long as there is an obligation for them to pay support. Proof that the policy continues to name an ex-spouse as a beneficiary is usually requested at least once a year and incorporated into the divorce agreement.

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Can you remove your ex-husband or ex-wife as the beneficiary of your life insurance policy?

Yes, as long as you own the policy. If you own a life insurance policy that insures you and names your ex-husband or ex-wife as the beneficiary, you can update the beneficiary on your policy to remove them. If you owe alimony or child support, however, a judge may order you to keep your ex as your beneficiary to ensure financial support continues after you pass away.

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Health insurance and divorce

If your ex-husband or ex-wife maintains a health insurance plan through their employer that covers you, it is likely that you will no longer be eligible to stay on their plan. If you maintain the health insurance plan that covers your spouse, it is likely that they will no longer be eligible to stay on your plan. However, children will be able to stay on your (or your spouse’s) plan until they reach the age of 26.

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How does divorce affect health insurance?

After you get divorced, you will be able to temporarily keep your health insurance coverage through a law known as the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA gives employees and their families who lose their health benefits the right to continue their coverage under their group health benefits provided by their group health plan for a limited period of time. If you lose your coverage due to divorce then you are entitled to stay on your former spouse’s plan for up to 36 months if they maintained the coverage through an employer that has at least 20 employees.

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What happens with health insurance when you divorce? Can health insurance be included in a settlement agreement?

Health insurance premiums can be included in a divorce settlement provided that the insurance company allows for non-spouses to be covered by the policy. It is common for the person who has maintained the plan to agree to pay for post-divorce health care coverage for a certain period of time, or until a substitute policy can be put into place.

Often times the payor ex-husband or ex-wife will only pay the required premium for their (plus the children’s) coverage and the non-employee ex-spouse will contribute the amount in excess of that premium to cover the extra costs for their coverage. Problems can arise when the employee's former husband or wife leaves their current job and the non-employee ex-spouse has to find their own plan. When this happens, people often become employed just to qualify for employer-subsidized health care benefits.

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Car insurance and divorce

Car insurance is an often overlooked component of a divorce and because the consequences can be so costly, it is important to know the risk of not doing it correctly. When you are going through a divorce, you cannot remove your ex-husband or ex-wife from your policy without their consent.

Driving a vehicle without car insurance is illegal so removing your ex-spouse or their vehicle from your insurance policy is not allowed without their consent, and they cannot remove you from their policy.

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How do you separate car insurance in a divorce?

Here are the ways you can deal with car insurance after divorce:

Separate Households: In order to effectively remove your spouse from your policy it is important to maintain separate households. If the divorce is not final and you both still live at the same address, your personal liability continues to be shared. You should maintain separate addresses before separating your car insurance policies.

Separate Vehicle Titles: Most insurance companies require the person insuring a vehicle to be listed on the title. A co-owner not living in the same household needs to be listed as an additional insured person. For the most protection, each ex-spouse should drive a vehicle titled only to them after a divorce.

Obtain a New Policy: For the most protection from shared liability, one of the parties will eventually have to get a new car insurance policy. If the home is also insured with the same insurance company, it might make sense for the person who keeps the home to also keep the existing auto policy.

Purchase a New Policy Before Being Removed From Prior Policy: New insurance needs to be in place before removing both the vehicle and driver from the pre-existing car insurance policy. It is important both named insured drivers consent to the removal of any driver and vehicle. Removing one without knowledge could force someone to drive without insurance which presents a serious financial risk in the event of an accident.

Sign a Removal Request: To verify the named insured driver has given consent to be removed, most insurance companies require a signed request before they will remove that person from the policy. Without the signed request, the person keeping the auto policy will continue paying for a policy which lists (and covers) both drivers.

It is best not to separate car insurance before the divorce is final. If you must separate your car insurance before the divorce is complete, be sure to keep your ex-husband or ex-wife informed of the policy changes.

Divorce is complicated and stressful. The financial decisions that you make before, during, and after your divorce can have long-term, unexpected consequences. Be sure to examine your life, health, and car insurance policies and consider the impact of the changes in your coverage to ensure that you understand and plan for your next chapter with confidence.

Gabrielle Clemens, Certified Divorce Financial Analyst (CDFA*), JD, LLM, Accredited Estate Planner, is a Financial Advisor at RBC Wealth Management – U.S. and Managing Director at Clemens Private Wealth Management Group and Seaport Boston Private Wealth Management. She is a 2021 Forbes Best-in-State Private Wealth Advisor, a 2021 & 2020 Forbes Top Woman Wealth Advisor, and a 2020 Top Woman Wealth Advisor, Working Mother Magazine.

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