What Happens to Life Insurance When You Divorce?

Divorce introduces many complexities, and life insurance, often overlooked, presents both an asset and a potential financial obligation. Its treatment during divorce proceedings can significantly affect the financial well-being of both parties and any dependents. Understanding how life insurance policies are handled in this context is important for securing financial stability post-divorce.

Characterizing Life Insurance in Divorce

Life insurance policies fall into two main types for divorce purposes: term life and permanent life. Term life insurance provides coverage for a specific period and typically does not accumulate cash value. Term policies are typically not considered marital assets subject to division, as they lack inherent financial value.

In contrast, permanent life insurance, such as whole life or universal life policies, includes a cash value component that grows over time. This accumulated cash value is treated as a marital asset, similar to other financial accounts or investments. The cash value may be divided between divorcing spouses, often valued at its cash surrender value at the time of property valuation.

The source of premium payments can also influence how a policy is characterized. If premiums for a permanent policy were paid using marital funds, the cash value is more likely to be considered marital property, even if the policy was acquired before the marriage. Marital property includes assets acquired by either spouse during the marriage, regardless of title, and is subject to equitable division. The cash value can be divided by cashing out the policy and splitting proceeds, transferring ownership, or offsetting its value with other marital assets.

Beneficiary Designations and Divorce

Updating beneficiary designations is important during and after a divorce. Many name their spouse as the primary beneficiary to ensure financial protection. After divorce, the policy owner may no longer wish for their former spouse to receive the death benefit.

Some jurisdictions have “automatic revocation” laws, or “revocation upon divorce” statutes, which may automatically revoke an ex-spouse as a beneficiary upon divorce finalization. These laws assume the deceased would not want their ex-spouse to receive the death benefit and aim to prevent unintended payouts. These laws vary by jurisdiction and generally do not apply to policies governed by federal law, such as those under the Employee Retirement Income Security Act (ERISA).

If a policy is not subject to automatic revocation, or if a court order or settlement agreement mandates it, the policyholder must formally change the beneficiary through the insurance company. This process involves submitting a new beneficiary designation form to the insurer. This change must be completed promptly, as the death benefit will be paid to the listed beneficiary if the insured dies before the change is made. Beneficiaries cannot be easily changed with irrevocable beneficiaries, or when a divorce decree explicitly requires a former spouse to remain a beneficiary to secure support obligations.

Policy Ownership and Transfer

Policy ownership is distinct from beneficiary designation, determining who controls the policy and its cash value. In divorce, cash value policies, such as whole life or universal life insurance, are valued and divided as part of the marital estate. The division of such policies can involve one spouse buying out the other’s interest, or the policy being transferred entirely to one party.

Transferring policy ownership involves completing an assignment or change of ownership form provided by the insurance company. This process formally transfers control and rights, including changing beneficiaries or accessing cash value. If a policy is maintained for a specific purpose, such as securing support, the divorce decree will often specify who is responsible for paying the premiums.

For example, a court order might require one spouse to maintain a policy and pay premiums, while the other spouse receives ownership or a mechanism to ensure compliance. If the designated premium payer fails to make payments, it breaches the divorce settlement, and courts can enforce payment.

Using Life Insurance to Secure Support Obligations

Divorce decrees or settlement agreements often mandate one spouse maintain a life insurance policy to secure ongoing financial support. This ensures alimony or child support payments continue even if the paying spouse dies prematurely. This offers a financial safety net for the receiving spouse and dependent children.

Required coverage amount and duration are determined by matching the length and amount of support obligations. For child support, coverage might be required until children reach the age of majority (often 18 or 21, depending on jurisdiction). For alimony, policy duration generally aligns with the period alimony payments are mandated. The supported spouse or children are commonly named as beneficiaries or contingent beneficiaries.

Ensuring compliance with court orders regarding these policies is important. This often involves providing proof of coverage and regular premium payments to the receiving party or court. Some agreements may allow the supported spouse to directly contact the insurance company for policy information, or to pay premiums if the obligated party defaults, to prevent policy lapse.