What do life insurance and divorce have in common? Besides being confusing, they’re both uncomfortable realities that most people would rather avoid. They are also often intertwined. If you don’t understand how life insurance works in your divorce, you and your loved ones can suffer huge financial consequences after your divorce is over.
The Role of Life Insurance in Divorce
Life insurance comes into play in two different ways in divorce. It can be a marital asset that gets divided in your divorce. It can also be used as security for child support, spousal support, and other financial obligations that arise from your divorce.
Life Insurance as an Asset
Not all life insurance is an asset. Only life insurance that has a cash value counts as an asset in your divorce. Typically, whole life and universal life insurance policies have cash values. Term insurance does not.
Tip: Life insurance that you get through your employer is usually term life insurance. It rarely has any cash value.
Term life insurance is typically in effect for a certain period of time: a “term.” After the term is over, the policy expires. If you want to continue to be insured, you then have to get a new policy.
If you die during the life insurance term, the policy pays your beneficiary a death benefit. Because term insurance has no cash value, the premiums are typically much cheaper than the premiums for whole or universal life insurance policies.
Whole and universal life insurance policies have no set term. These policies don’t expire. They continue on for as long as you pay the premiums.
Like term insurance, whole and universal life insurance pay a death benefit to your named beneficiary when you die. But, unlike term insurance, whole and universal life insurance policies also accumulate value while you are alive. That makes them assets in your divorce.
Life Insurance as Security
In divorce, life insurance is typically used to secure any ongoing financial obligations. You can use it to secure alimony or spousal support. You can also use it to secure child support and children’s expenses. So, for example, if your spouse has to pay child support and contribute to your kids’ college educational expenses, you can require him/her to have to maintain life insurance with a death benefit big enough to cover those payments if s/he dies.
Life insurance may be required to secure the payment of:
children’s medical and educational expenses,
children’s college expenses,
any other type of ongoing financial obligation from one spouse to another.