Getting a divorce creates a number of financial planning issues. One of the most important (and most frequently overlooked) has to do with life insurance. The ownership of life insurance policies and the naming of beneficiaries should be considered during the divorce process to ensure that former spouses and children are protected financially and that any life insurance proceeds go to the intended recipient. However, a confusing web of different state and federal laws can make the question of who receives life insurance proceeds after a divorce a difficult one to answer.
Don’t Forget to Update Your Beneficiaries
Problems most frequently arise with life insurance proceeds after a divorce because of confusion over who is rightfully entitled to receive benefits from the policy. Depending on the laws in your state, failing to change your beneficiary designations could mean that proceeds from your life insurance policy go to your ex after your death, not your new husband or wife (if you’ve remarried). To minimize problems in the future—and reduce the risk of a lawsuit—it’s typically a good idea to change your beneficiary designation as soon as possible after the divorce, so that everything is up to date.
A Word on State and Federal Law
One reason the issue of who receives life insurance proceeds after a divorce can be so confusing is that different states have different laws regarding this issue. Some states require that you take clear action to show that you intended to change the beneficiary of your life insurance policy. Usually, that means you must complete a new beneficiary designation form, though in some cases, the courts may decide that a divorce settlement that mentions life insurance policies is enough to determine a person’s intent. However, a few states (including Ohio and Texas), take a different approach. In these states, the ex-spouse is automatically removed as beneficiary after a divorce, unless the separation agreement says otherwise.
This may sound all relatively straightforward, but in reality the legal issues surrounding life insurance can be incredibly complex, especially if the policy is governed by the Employee Retirement Income Security Act, or ERISA. In those cases, federal law may supersede state law, creating additional confusion. For this reason, it’s critical to retain the services of a qualified attorney who can advise you on the best way to ensure that the intended recipients receive the benefits of your life insurance policy (or that you receive the benefits to which you are entitled).
Life Insurance Needs After the Divorce
Whether you’re the owner or beneficiary of a life insurance policy, you’ll need to reevaluate your insurance needs after your divorce. If you receive alimony or child support payments from your ex-spouse, for example, a life insurance policy could help ensure that you continue to receive those payments even if your ex-spouse dies. You may choose to purchase coverage yourself, or the court may order your former spouse to buy a policy that names either you or your children as the beneficiary. If that’s the case, you’ll also need to make sure that your ex-husband or ex-wife continues to make timely premium payments and that he or she doesn’t change the beneficiary at a later date. It may be wise for you to be the owner of the policy, while your former spouse actually makes the premium payments, either to you or to the insurance company directly.
If you’ve purchased life insurance with the idea that it will help support your family after your death, think carefully when choosing a beneficiary. If you don’t trust your ex-spouse’s financial judgment, for example, it may be wise to name the children as beneficiaries but have the insurance proceeds paid into a trust.
Get Professional Advice
Divorce is a complicated process, both financially and emotionally. It’s not the time to try to do everything yourself. Instead, you should put together a team of experienced attorneys and financial advisors who can help you navigate your new situation and make appropriate decisions about life insurance and other financial issues after a divorce.
By Chris Cooper, CFP®
