How does divorce affect the beneficiaries of a life insurance policy?

When taking out life insurance policies, spouses commonly list each other as the “primary beneficiary,” or the person who will receive payment if the policyholder passes away. Divorce, however, can complicate this process on several levels. The policy owner might want to designate a new beneficiary in place of their ex-spouse, while a parent with majority custody may want to safeguard child support or alimony from the other parent. Although life insurance might not be the first thing on your mind during a divorce, it is nonetheless imperative that you adapt your policy to your new life.

“Revocable” and “irrevocable” beneficiaries

If you are the owner of a life insurance policy, you will likely want to change the primary beneficiary from your ex-spouse to someone else, such as a child or other family member. In these cases, changing who gets paid upon your death involves “revoking” the status of the previous beneficiary and designating a new one in their place.

In these sorts of cases, the first thing you will want to do is call your insurance agent and ask if your policy’s beneficiaries are revocable. If so, you will be able to change the primary beneficiary without getting their permission. If your previous beneficiary is “irrevocable,” however, then they must consent before you can designate a new beneficiary, which could require some difficult conversations.

Generally, irrevocability of beneficiaries only occurs in the nine (9) community property states, which dictate that all property acquired during marriage belongs equally to both parties. In some other states, statutes automatically revoke beneficiaries during a divorce, in which case life insurance claims would go to the secondary beneficiary or close family members. If your life insurance plan is purchased through an employer (see ERISA), however, your policy is subject to federal law and beneficiaries are not automatically revoked. 

Safeguarding child support/alimony

In cases where one party receives majority custody, child support and alimony payments may be critical for both the parent and the children. Taking out a life insurance policy on your ex-spouse can be an effective way to safeguard against potential loss of income upon their death. There are several considerations to keep in mind during this process.

Firstly, it is most prudent for you to be the policy owner and for you to pay the premiums. If you entrust your ex-spouse with making consistent payments on a plan that can only benefit you, chances are that he/she will not follow through. Life insurance claims can be denied over failure to pay even the most insignificant premiums, so it is important to be consistent when making payments. Additionally, owning the policy entitles you to certain rights, such as changing beneficiaries.

Secondly, life insurance plans are expensive. If you intend to buy a policy on your ex-spouse, make sure to include estimated premiums when negotiating child support and alimony payments. That way, even though your ex-spouse is “paying” for the policy through increased child support and/or alimony, you can manage the premiums and make sure they are paid on time.

Life insurance as an asset

Depending on your life insurance plan, your policy may accrue “cash value” over time. (While a common feature in “permanent,” or “whole” life insurance plans, such policies tend to be more expensive than temporary, “term” based alternatives.) This “cash value” can function as a form of tax-free investing in which your funds grow through interest over time.

The utility of your “cash value” fund is contingent on the terms of your individual policy. Some policies allow this to be withdrawn directly while many more allow policyholders to use their “cash value” for loans. Regardless, the “cash value” of your life insurance policy (as well as the policy itself), which has been paid for by you and/or your ex-spouse, should be considered an asset in the same way as any other major investments or property.

One feasible option might be to negotiate a price for ownership of the policy and the “cash value” it includes, allowing you to buy the ownership rights (e.g. making payments and designating beneficiaries) to your ex-spouse’s existing plan.

It is important to include such policies when negotiating/contesting assets. If the policy owner wants to withdraw their policy’s cash value and end the policy, it should be split with their ex-spouse in the same manner as real estate property or stock market investments.

When should I contact a life insurance lawyer?

It is advisable to contact your life insurance lawyer at any point during this process. Your lawyer will help you understand your rights and prerogatives, as well as how to best negotiate your existing policy and/or set up a new one. If you are unsure of how to handle the situation, it is generally best to err on the side of caution and relay the situation to an expert.