The amount of life insurance you own relates directly to the circumstances of your life. You buy life insurance to protect your family from the financial loss stemming from your death. You adjust the amount of coverage based on the amount of money your family would need to pay for living expenses, financial commitments like debt, and putting the children through college.
But what happens to life insurance when you’re about to dissolve your marriage? How do you deal fairly with a soon-to-be ex-spouse, yet still make sure you have coverage for the future? Is there a way to provide for adult children of a previous marriage without going broke, especially if you have children from a second or third marriage? Here are a number of considerations you should be aware of:
Don’t assume that your insurance agent of company knows about your circumstances. If you don’t change your beneficiary, your former spouse may receive the process of your policy upon your death. If the designation simply reads “husband of the insured” or “wife of the insured,” and there is no new spouse, the secondary beneficiary receives the proceeds.
You may be able to transfer ownership rights of the policy as part of a property settlement agreement or to ensure continuation of alimony payments. Your ex-spouse may not press as hard for more support or a greater slice of an ongoing pension if he or she remains the designated beneficiary on a permanent life insurance policy. Of course, you need to ensure that your policy remains a valuable asset by keeping up premium payments.
Be aware that transferring an existing life insurance policy may carry with it the burden of federal gift tax, unless you transfer the policy prior to divorce. Be sure to discuss this option prior to the finalization of your divorce.
Don’t overlook the possibilities life insurance may provide for dealing fairly with children from your previous marriage. If you’re paying alimony to your previous spouse and have a second family with your new spouse, adult children from your first marriage may sue your estate after you’re gone if they aren’t dealt with at least as fairly as the children from your subsequent marriage(s).
A permanent life insurance policy can be an immediate “estate replacer” for children from your first marriage. It helps you replicate accumulated assets that you wish to pass on to the children of your first family without neglecting the needs of your new family. Essentially, you purchase a permanent life insurance policy on yourself and designate your adult children as beneficiaries. When you die, proceeds bypass the probate process and pass directly to your adult children. Your immediate spouse and any children from that marriage are left with your accumulated property and assets – so you’ve provided for both families.
If you’re contemplating divorce, don’t forget the options you may have with respect to your life insurance coverage. Divorce is tough enough – don’t overlook the flexibility and security this valuable asset can provide.