Ever notice how no one enters a marriage thinking it will end someday?
Yet, roughly 42–45 per cent of first marriages in the United States end in divorce, 60 per cent of second marriages, and 73 per cent of third marriages.
To complicate matters even more, a judge may order the providing spouse to maintain a life insurance policy to cover alimony or child support obligations to the recipient spouse as part of a divorce settlement.
Still, the fact remains that going through a divorce, whether justified or not, is difficult both emotionally and financially, especially with children involved. Adding the nuances of a life insurance policy in the midst of it is probably the last thing on your mind, but it shouldn’t be. You need to know what questions to ask.
Let me explain.
Should You Demand Life Insurance in a Divorce Settlement?
Most people think life insurance is a vehicle to fund a lavish lifestyle for the beneficiaries once the insured dies. That couldn’t be further from the truth. The sole purpose of life insurance is to replace or protect the “true value of life,” as measured by one’s economic value to his/her dependents.
Reasons You Should Ask
- Alimony payments
- Child support
- Any mutual obligations, such as a mortgage (for the marital home) or business loan
The takeaway: Unless there are children, alimony, or financial obligations between you and your ex-spouse, then there is no reason to carry life insurance on anyone.
What if I currently have a policy?
Since most policy owners list their spouse as the beneficiary of the policy, in the case of divorce, there is a good chance they may want to name another designated beneficiary on their policy. That’s if, of course, there is no court-ordered life insurance policy.
How to Change Your Beneficiaries After a Divorce
If you do not need your ex-spouse to be the beneficiary of your current policy, then you should change it to a new one. Remember, the beneficiary is the one who receives the death benefit proceeds when you pass away. So, ensure you designate a person with your trust and best interests at heart.
Is my current policy an asset we need to split?
That depends. There are two types of life insurance: term and permanent. Term life, also called temporary protection, covers the insured for a specific period and doesn’t accumulate any cash value. Long story short, it doesn’t have any financial worth if you divorce.
On the other hand, if you currently have a whole life or universal life policy, and the policy has a cash value, then you may need to split it just like any other asset (a house, cars, etc.) in a divorce.
I don’t have a policy and I got a court order to buy one: What now?
There is probably a good reason the court ordered you to do so, and it’s perfectly understandable why someone wouldn’t want to carry a life policy on their ex-spouse, especially if it was a grievous divorce.
In most divorce settlements, the breadwinner must carry a life insurance policy to protect against alimony and child support, provided the ex-spouse depends on them financially. Additionally, buying a term policy will not break the bank – it’s probably the least expensive expense in a divorce.
Which policy should I purchase in divorce settlements?
Now we’re getting somewhere. The judge, your spouse, or this article has convinced you that there is no way out, and you must purchase a policy, and you’re right. Which one do you buy?
In most divorce cases, the providing spouse elects to buy term life insurance. The term periods typically range from 5-30 years, with 20 years being the most popular. It’s straightforward and the most economical coverage (as long as you are in good health) that you can buy.
There is no cash accumulation or investment component in the policy to bother with, either. Instead, you pay for “pure life insurance” and nothing more. If you die during that term, your beneficiary will collect the death benefit specified in the policy.
On the other hand, if you outlive your term period, you can convert it to a permanent policy, pay annually until a certain age (typically 95), or drop it.
Look at it this way: Term life insurance is also a good solution if you need to cover child support until the child reaches 18 or 21. But if you need to cover alimony for decades, the judge may order you to buy permanent coverage, as a term policy wouldn’t be sufficient.
What if I need the coverage to start immediately?
If you do, you probably waited too long to get coverage, and you may need to consider talking to your attorney to get an extension.
Few life insurance companies offer term life without an exam. Even fewer companies, such as Sagicor Life, offer online applications with instant approval, provided you are healthy enough.
Warning: Don’t be fooled by the catchphrase “no-exam coverage.”
No-exam coverage doesn’t mean instant approval or, worse, guaranteed issue coverage. It means the insurance companies aren’t using the exam results as part of the approval process.
Instead, they would evaluate your application for coverage based on third-party sources such as the Medical Information Bureau (MIB), Motor Vehicle Report (MVR), and prescription database. You will also undergo a recorded phone interview, though you may still get denied coverage.
For people who are young and in good health, no-exam policies are an excellent option to contemplate as long as you understand that you will pay more for it. In other words, you pay for the convenience of not taking the exam, so you shouldn’t wait for the last moment to apply and always opt for a traditional term life (with the exam) if getting the lowest price is essential to you.
What if I can’t qualify for coverage?
If you can’t qualify for traditional life insurance due to health issues, then you may be eligible for a waiver – your attorney would be a better source to consult to make sure.
You also may consider buying guaranteed issue life insurance, although the death benefit typically does not exceed $25,000.
Life Insurance Tips for the Providing Spouse
- Compare rates. Make sure you don’t apply at the last moment and compare rates from the top-rated carriers. Better yet, find a broker who works with multiple companies and can match you with the best one based on your overall health, needs, and chances for approval. Remember that the prices are fixed by law, and brokers do not charge a fee for their services.
- Buy what you need. If you need to cover child support until the child reaches a certain age, then do just that. For instance, if your child at the time of divorce is three years old, and you need to have a policy in place until he turns 18, a 15-year term will suffice.
- Don’t skip the exam. Again, no-exam life insurance will cost you more. If you are healthy and don’t need the policy to take effect soon, then take the exam. Your wallet will thank you.
Life Insurance Tips for the Recipient Spouse
- Insist on becoming an irrevocable beneficiary. A life insurance policy can have either a revocable or irrevocable beneficiary. While the policy owner can change a revocable beneficiary at any time without the consent or signature of the current beneficiary, with an irrevocable beneficiary, the policy owner requires the current beneficiary to sign off on any policy changes.
- You may want to become the owner of the policy. By doing so, you get notifications if the policy owner misses a premium payment or if any policy changes require your attention. You may also want to pay the premium yourself, especially if you know that your ex-spouse will have some issues paying.
- Get a sufficient face amount. Make sure you calculate the needed amount before agreeing on the policy’s value. You guarantee to protect things like your child’s education if things go south and he/she dies and can’t provide anymore.
How much does it cost?
Now, here’s the good part. To give you an idea, here are some sample monthly rates for individuals in the preferred best category who do not smoke. Your prices may vary based on your age, gender, health history, and driving records, to name a few.
20-Year Level Term Male $250,000
- 25-year-old: $12.89
- 30-year-old: $13.05
- 35-year-old: $13.59
- 40-year-old: $17.80
- 45-year-old: $27.78
- 50-year-old: $40.44
- 55-year-old: $63.27
20-Year Level Term Female $250,000
- 25-year-old: $11.38
- 30-year-old: $11.61
- 35-year-old: $11.96
- 40-year-old: $15.43
- 45-year-old: $22.43
- 50-year-old: $30.90
- 55-year-old: $47.04
It all adds up to this: Since you have no way of predicting what tomorrow brings, you should ensure that you are covered.
If you have children or receive alimony payments, you wouldn’t add another financial devastation to the list if your ex-spouse dies prematurely. Now, make it happen.