There is no getting around the fact that even the most amicable divorces are messy. There are many assets to be divided and new living situations to adjust to. One of the many tasks that come along with divorce is sorting out life insurance. Updating your life insurance is even more critical if there are children involved.
Keeping life insurance updated can help protect the financial interests of both parties and their dependents. The process involves making necessary beneficiary changes and ensuring that your life insurance will protect your children in your next stage of life. Maintaining your life insurance, especially if you become a single parent after the divorce, is essential to prevent financial hardship for your children should you pass away.
Getting a divorce does not automatically invalidate or change your life insurance policy. If you or your ex-spouse want to adjust your respective life insurance policies, you must do so through your insurance provider. There are several steps to updating your life insurance after a divorce. Here are a few things to consider as you adjust your life insurance after divorce.
Examine Your New Living Situation and Determine Your Life Insurance Needs
Your financial situation can completely change once you divorce, so you must ensure that your life insurance is updated to reflect this new stage in life. Before you do anything else, you need to think about how your life insurance policy will change now that you are getting a divorce. You can start by asking yourself a few simple questions:
What happens to your life insurance if your ex-spouse passes away? If you rely on support payments from your ex-spouse, could you manage if the payments stop? Without provisions for future support payments, you could be in trouble.
What happens to your life insurance if you pass away? Consider it part of your separation agreement for your ex-spouse to also have life insurance for your children.
How much life insurance do you need? Your life insurance amount will depend on several factors, such as how much support you or your ex-spouse pays and the age of your children. If no children are involved, then you will likely need less coverage.
By taking stock of your new living situation, you can better understand your life insurance policy and how it will affect any children in the picture.
Update Your Life Insurance Beneficiaries
The primary purpose of life insurance is to protect the people closest to you from financial hardship if you pass away. Most married people list their spouse as the primary beneficiary; however, when you divorce, you likely will not want your ex-spouse on your life insurance policy.
Most beneficiary designations are revocable, meaning that the policy owner can change the beneficiary at any point during their lifetime. However, suppose your ex-spouse was named an irrevocable beneficiary on your policy. In that case, you will need their consent to remove them and may require their consent to make any other changes to the policy.
If there are children involved, they should potentially be updated to be the primary beneficiaries, and if they are underage, you may appoint a trustee to hold it until they are older. If no children are involved, you may consider another family member or friend as your new beneficiary or even donate your estate.
Account for Any Life Insurance Cash Value
Any permanent life insurance policy will have a cash value that has accumulated worth over time. When you make your payment each month, a portion goes into a fund that increases as it earns interest, and you may withdraw it at any time while the policy is active.
The cash value from a life insurance policy represents part of your net worth as a married couple and needs to be listed among the marital assets to be divided. If all assets are divided evenly, each spouse will receive half the cash value from the policy.
Once the life insurance policy is cashed out, one of two things could happen. The life insurance policy is still active, so it could be updated for one of the parties, and the other may take out a new life insurance policy. The other option is for the life insurance policy to be surrendered and for both spouses to take out new life insurance policies of their own.
Protect Your Child Support and Alimony with Life Insurance
If children are involved in your divorce, protecting your child support or alimony is extremely important for the spouse who takes primary custody. If the non-custodial parent passes away, any child support or alimony they may have paid is lost and could leave the remaining parent in a bad financial situation.
One way to protect your children from this situation is to maintain a life insurance policy with a death benefit large enough to completely replace any child support or alimony payments until the youngest child is of legal age.
Suppose you have primary custody of your children and have concerns that your ex-spouse may not live up to the terms of the divorce settlement. An adequate life insurance policy could be essential to ensure that both incomes are covered if you pass away.
Ensure Your New Life Insurance Policy Can Support Your Children
Whether you can rely on your ex-spouse or not, it is crucial to ensure that your children are protected. They depend on you for financial support and, in the event of your passing, may have no way of supporting themselves. A life insurance policy ensures their financial security, and can potentially help them provide for themselves until they are grown up.
Adequate life insurance is even more crucial if you get primary custody of your children and can’t count on your ex-spouse for payments. If this is the case, make sure you own your life insurance policy and pay the premium since failure to do so can result in losing your coverage.
Every divorce is different, but what they have in common is the need for adjustments to your life insurance policy. If you are in the process of divorce, contact Canada Protection Plan to talk about any adjustments that may need to be made to your life insurance.
421637 CAN (03/23)