Life insurance and divorce: What happens next?

Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York

Most of us have experienced the reality of divorce in some way or another. But if you're one of the parties involved, separating from a spouse is a tremendous source of stress. It also can have a significant impact on both partners' financial situations, affecting short- and long-term goals.

If you're going through a divorce and are dividing marital assets, your life insurance likely isn't at the top of the list. Especially with other, pressing issues like bank accounts and real estate, alimony and child support.

But your life insurance is as important now as it was the day you bought it — if not more so. As you work out your divorce agreement with your attorney, don't forget to update your life insurance beneficiaries. Chances are, you still have important goals for that life insurance policy — and you want to be sure they're still met.

Life insurance after divorce

As you and your spouse work out a divorce agreement, you may face several scenarios when it comes to your life insurance. Common questions include:

• Can I keep my life insurance after my divorce?
• How does my divorce affect the beneficiary of my life insurance policy?
• Who will pay the premium for my insurance policy after the divorce?
• Do I have the right amount of life insurance, or the right type of life insurance?

The answers will depend on your situation. Your divorce settlement, also known as a divorce decree, will determine how your marital assets, including your insurance policies, are distributed. The settlement also addresses post-divorce financial obligations, like alimony and child support.

An experienced lawyer and a financial planner can help ensure you are financially protected during your divorce.

Court-ordered life insurance in a divorce

Life insurance is not always required or included in a divorce settlement. However, it can play an important role in your post-divorce financial security, especially if there are children involved.

Can the court require life insurance coverage?

If you were awarded alimony or child support in your divorce settlement, you will rely on that money to take care of your children. If your ex-spouse were to die, those payments would end, and you might struggle to make up for that lost income.

But, if you or your children were the beneficiaries of your ex's life insurance policy, the policy's death benefit could ease financial hardship.

If you were awarded primary custody of your children, the court could also require you to own a policy on your ex-spouse with a death benefit high enough to replace child support.

Who owns and pays for the life insurance after a divorce?

Your divorce decree will indicate who owns the life insurance policy, the people that policy covers and who will pay the premium. The court also can dictate if your children must be named as beneficiaries and whether they must be the only beneficiaries on the policy.

Ownership rights are dependent on the settlement. If an ex-spouse is required to pay the premiums and they do not, this is a breach of the settlement, and the courts can enforce payment.

What about the cash value component of permanent life insurance?

Most people think about how assets are split in a divorce. But they often overlook permanent life insurance and the built-in cash value component.

Unlike term life insurance, which is often considered a separate asset in a divorce, the cash value of a permanent life insurance policy could be considered a joint asset — part of your net worth as a couple.

The court could ask you to provide the cash value of the policy. That value would then be divided between you and your ex-spouse.

How divorce affects your beneficiary options

After a divorce, it's important to review your beneficiary selections.

Most life insurance policies are revocable, which means that the policy owner can change elements like the beneficiary at any time. Some appoint irrevocable beneficiaries, which means you can't choose to change the beneficiary or cancel the policy without that person's consent. This is more common in the case of a divorce.

If there are children involved, you may have the desire to change the beneficiary from your ex-spouse to the children. This may be needed as a part of the divorce settlement, but there are times where it's up to you. In these instances make sure to do your homework before naming a minor child as the beneficiary.

Keep in mind that a spouse who is named as an irrevocable beneficiary has the right to a policy payout even after a divorce. Be sure to review your policies as part of your divorce settlement, which will dictate who the beneficiary should be if the life insurance policy is part of the settlement.

Take control of your life insurance.

If life insurance isn't mandated as a part of your divorce, it's still an important factor to review. You'll want to update your contact information, review your beneficiaries, and take a comprehensive look at your existing policies to be sure they provide enough coverage to meet your needs.

Taking out adequate life insurance on yourself can protect your children until they become adults. For example, if your annual income is $50,000 and your youngest child is 6, a death benefit of $600,000 will replace your income until that child is 18. This insurance payout will help your children's guardian care for them if you die unexpectedly.

One of the biggest challenges of divorce is that it often turns people into single parents, who become their children's sole caretakers. If your ex-spouse is no longer in the picture and is not living up to financial obligations like alimony or child support, you'll need a plan to care for your children financially if something happens to you.

If you have questions about the type of life insurance that's right for you or need help, it's important to connect with an insurance agent who can help you navigate this major life event.