Family law is heavily state–specific based, and as the laws change information in this article may become quickly outdated. This blog article is general in nature, so for up-to-date specifics pertaining to your resident state, please consult a family law attorney.
Often times when upon divorcing, a court may order that a life insurance policy be purchased on the supporting spouse (the one paying for alimony or child support). This article will discuss the reasoning and need for life insurance during a divorce, and the best types to utilize.
Upon marriage or divorce, it is important to consider what property is yours and what is marital property. Separate property is just that, it is separate from the marital property and it is owned by only one spouse and is not subject to division upon divorce. A “Term” life insurance policy is generally not treated as marital property due to the fact that there is no surrender or loan value that can be divided. A “Permanent” life insurance policy may be characterized as separate or marital property because of the cash “surrender” value (surrender value is less than the total cash value for the first 10-15 years of the policy). Generally, property that is owned prior to marriage will be considered separate property. However, if policy premiums are paid with marital funds, such as wages, then part of the policy will likely be considered marital property. Alternatively, some states may not consider the policy marital property but instead will allow the non-owner spouse a claim against the marital property for the enhanced value of the policy that is due to the marital property. There are a few other ways a spouse can gain separate property such as a gift and inheritance but for the most part, if the property is acquired during marriage it will likely be considered marital property and subject to division.
Upon divorce, an individual should review their life insurance beneficiaries to make sure they are still current. For individual life insurance, the majority of states treat an ex-spouse beneficiary as if the ex-spouse predeceased the insured. This causes the death benefit to be paid to the contingent beneficiary, if any, or the insured’s estate. However, if the ex-spouse is the court ordered beneficiary or if the ex-spouse was re-designated after the divorce decree, then they will remain as beneficiary.
Group employer–sponsored life insurance will likely be subject to ERISA, which states that the beneficiary designation remains unless the insured changes the beneficiary. However, if the court issues a “Qualified Domestic Relations Order” (QDRO) naming the ex-spouse as a beneficiary of the life insurance and it is properly filed prior to the insured’s death, then the QDRO would control how the death benefit was paid. Beneficiaries on any IRAs as well as company–sponsored retirement plans should also be updated as well.
In many divorces that include provisions for alimony or child support, the court order will often require the supporting spouse to carry a life insurance policy to ensure that the settlement will be paid if the supporting spouse dies. If insurance is required, the term of coverage will need to be determined. If the policy is meant as security for child support only, the policy can be terminated when the last dependent child reaches the age of majority. It may also be negotiated that the policy remain in effect for a longer period of time stated either as a term of years after all the children’s education is completed, or in some cases for life with the children as beneficiaries. If the insurance is for alimony, it may last for as long as the alimony payments continue which may be for life, until the payee is remarried, or until retirement plans are accessed at retirement if the spouse receives an interest in the retirement plans.
If the court does not order life insurance, it may be in the best interest of the non–supporting spouse to take out a policy insuring the supporting spouse to ensure future alimony or child support payments.
If the coverage is only needed for a short period of time, then a "Level Term" policy will suffice. Term lengths are generally available in 5-year increments: 10, 15, 20, 25, 30, 35, and now even 40 years. Term policies can also be available in 1-year increments between 15 to 30 years (17-year Term, 24-year Term, ect).
If the need is permanent, then I recommend a "Guaranteed-No-Lapse" Universal Life (GUL) policy over any type of cash value policy. The GUL functions as a permanent Term policy where you are covered for life, all the while accumulating no cash value. These policies cost about half of what a traditional whole life policy would. My reason for advising against cash value policies is four-fold. First, if you borrow the money in a cash value policy your premium will increase due to the interest on the loan (typically 5-8%). Second, whenever you access the cash value your death benefit is reduced accordingly. This defeats the purpose of having a specific ready death benefit. Third, aside from there being no cash accumulated for the first 1-3 years (5 years with some policies), the cash accumulation rate of return is very low compared to most pure investment products available today. Fourth, upon death your cash value goes to the company not to your beneficiaries. So if you have a $100,000 policy that has accumulated $30,000 in cash value at your time of death, your beneficiaries will only receive $100,000 not $130,000. For any significant long-term cash accumulation, you would be far better off investing in pure investment products that are held in either an IRA or a company retirement plan (both of which have designated beneficiaries).
We at Malleo Financial Services can work together with your divorce attorney to help you find an affordable life insurance policy that best suits your specific need.
For a free consultation, please contact us for an appointment.
*This blog is strictly the opinion of Michael A. Malleo and not those of
ASH Brokerage Corp., nor any of our affiliates.
Malleo Financial Services LLC cannot and will not give any specific tax or legal advice.
Please consult your tax professional or legal professional for such advice.