Most people buy life insurance to help family members stay financially secure after the policyholder's death. Yet, when a marriage ends, the topic of life insurance after divorce is too often overlooked.
These five tips can help you and your soon-to-be-ex discuss important changes to your policies before you sign the papers:
- Determine how much coverage you'll need. Examine what your ex-spouse's financial situation would be like if alimony and/or child support payments ended. Talk with your State Farm® agent and divorce attorney to arrive at a specific amount.
- Read the divorce agreement carefully. "Life insurance policies are often used to secure alimony and child support payments," says Steven Weisbart, Ph.D., senior vice president and chief economist at the Insurance Information Institute . Before you sign any documents, make sure they meet your needs and that you'll be able to comply with them. Divorce agreements are legally binding and can be difficult to alter. Discuss with your legal representative any questions you might have.
- Discuss duration of coverage. The time frame for any obligatory life insurance coverage varies, often depending on the length of the court-ordered alimony and/or child support. These are typically temporary needs. Ask your insurance agent about a term policy which could be used to help meet the financial obligations of raising your children or providing your ex with financial support should you pass away.
- Decide who will pay the premiums. Having your ex-spouse pay the insurance company may be convenient, but if you're concerned about the possibility of default, talk with your lawyer about having payment responsibility written into the divorce agreement. Or, have your ex add you to the policy record so that you may receive duplicate copies of billing and lapse notices. "The consequences of your ex not paying you are less than if he or she doesn't pay the insurance company," Weisbart says. "Failing to pay the insurance company could cost you the policy."
- Re-designate beneficiaries. Depending on the divorce settlement, many couples will rename the beneficiaries of the life insurance on their ex-spouse to their children or create a trust to handle the proceeds of a premium. In some states, probate laws automatically disqualify a former spouse from receiving life insurance proceeds unless the insured re-designates their ex-spouse after the divorce. If the children are minors, consider appointing an adult custodian or trust to receive and handle the benefits on their behalf. Be sure to specify when the money will be transferred to the children and the percentage each child is to receive, Weisbart says. Also keep in mind that beneficiaries cannot be re-designated after the insured's death, so it's critical to keep the policy up to date .