Life insurance is an important financial tool, but it can be confusing to understand. If you have insurance, or need more life insurance after divorce, follow these tips to ensure that you have the best possible insurance plan.
What You Should Know About Life Insurance After Divorce
If You Have Life Insurance
- Review your policy and determine if it still provides the appropriate coverage. If you don’t need the policy, you can usually reduce the coverage (and premium) or cancel it. However, if you have permanent life insurance with cash value (such as whole life or universal life policies), make sure you understand the implications before you borrow from or cancel the policy. If your policy has a gain, you will owe taxes if you cancel it. Involve your insurance broker and CPA before making any decisions.
- Update the beneficiary. Contact the insurance company and ask to change the beneficiary so that it is no longer your ex-spouse.
- Plan your payments. Make sure you know when your premiums are due. If you will be changing your address, you might find it easier to switch to automatic monthly premium withdrawals so that you don’t have to worry about missing a bill. If you receive bills in the mail, note the premium due date on your calendar so that you are sure to pay it on time.
If You Need a New Life Insurance Policy
- Do your homework before making a commitment. If you have health issues, look into possible pricing before legally committing to buy insurance. Life insurance pricing varies based on gender, age, state and most importantly, health. If you have a history of a serious health issue, the insurance might cost much more than anticipated.
- Read the fine print. You might be required to get life insurance if you have an obligation to pay alimony as part of your divorce agreement. If so, make sure you understand the terms of the agreement so that you can find the appropriate policy. For example, many divorce agreements allow the insured to reduce the amount of life insurance over time (as the required amount of total alimony drops) but not all insurance companies allow reductions.
- Work with an independent insurance broker. They will be able to help you compare quotes from multiple companies and find the best policy. Don’t work with an agent that only represents one company, because they have a financial incentive to sell their employer’s products. Resist the temptation to shop online. You will be overwhelmed with choices. The pricing is the same whether you go online or through a broker, but the broker will provide you with insight and service that you won’t get from a website. In addition to pricing, a broker can help you better understand how one insurer differs from another.
- Comparison shop. It’s important to shop around because prices vary dramatically – one policy could be double the price of another! Ask your broker to show you quotes from at least three insurers. Compare different products, such as term and permanent or different term lengths, so that you have a good understanding of your options.
- Engage the experts. Talk to your financial advisor, CPA, matrimonial attorney and estate planning attorney about your life insurance needs. They can help make sure that you get the best possible insurance plan, whether it is a part of your divorce agreement or to protect your loved ones as you move forward with your new life.
- Take your time. Too many people rush because they want to ‘get it over with’ or because they get confused by the legal and financial jargon. A life insurance policy is a vital part of your financial plan and you will likely have it for decades. Take the necessary time to research and understand your options.
Erin Ardleigh is the founder and president of Dynama Insurance, an independent brokerage based in New York City helping clients nationwide. Dynama Insurance offers unbiased, highly personalized advice on existing insurance and new policies. For more information, go to www.DynamaInsurance.com.
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