Life Insurance During Divorce
by karls | November 12, 2008
Life Insurance is often a critical asset in a divorce situation. Often the divorce decree will state that one of the spouses is required to buy a new life insurance policy with the former spouse as beneficiary. The idea is to provide a lump sum in place of the alimony and child support payments to the spouse. For purposes of this life insurance during divorce discussion we’ll assume the divorce decree requires the husband to pay support (alimony) to his ex wife and also to pay child support.
The decision of who will own and pay for the policy is often a point of contention in negotiating the divorce decree. If the spouse receiving maintenance is owner of the policy she must use her after tax dollars to buy it, lowering her perceived after tax income from the alimony. Many times she will agree to let the ex-husband own the policy and promise to keep it in force to satisfy the divorce decree. There-in is a potential problem. If the husband owns the policy and pays for it and simply names his ex-wife as beneficiary he has the option to change the beneficiary in the future! The insurance company is not required to notify the beneficiary of the policy that a beneficiary has been changed. Due to privacy regulations, the carrier won’t discuss the beneficiary designation with anyone but the owner of the policy, or someone the owner has signed an authorization to discuss such matters with.
The best solution is for the wife to insist on ownership of the policy being transferred to her. That way she can receive the premium notices, pay them, and know that the insurance company will communicate with her regarding matters concerning the policy. Most importantly, she controls the beneficiary designation! If the premium is modest, this is by far the best solution. If the premium is several thousand dollars a year or higher and the spouse is concerned about using her after tax dollars to pay for the policy, she and her attorney could insist a trust be set up to own and be beneficiary of the policy. The husband would pay the money to the trust and the trust would then pay the premium to the insurance company. The trust can be worded so the spouse has a right to check on the status of the policy and be notified by the trustee of any changes to the policy. There is a cost to setting up the trust, but it may be the best solution.
Interesting aspect of insurance. Thank you for your article and insight.
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Well the obvious answer is to lift privacy restrictions on life insurance policies. You should have to be notified when someone has a life insurance policy on you, and when one of those policies has been taken off or decreased. That way a spouse doesn’t have to continually fret about whether his/her significant other is still protecting them with insurance. Obviously the best answer would be for the two to share, but it doesn’t always work that way and divorces can be so bitter than one might actually want the other to be in the dark about their insurance policies. Such a rule change would obviously benefit everyone involved.
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Vlad, knowing who the beneficiaries of a life insurance policy are seems to be a terrible terrible idea. Have you never seen a cop show: its always a motive of life insurance or willing property to someone else. This will also just let people complain to everyone about life insurance and create really sticky situations for the people involved. This extends beyond just the alimony problem, it has wider implications as well.
I think the solutions that Efinancial presented make sense: either paying for it yourself or creating a trust. This solves all the problems without just violating everyone’s privacy rights.
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Wait, im confused. Can you really just take out insurance policies against someone else’s life? That seems odd and promotes bad incentives all around. Can I take out a policy on Natalie Portman’s life if I will feel less fulfilled and more unhappy if she isn’t alive?
Can someone explain the parameters under which you can take out a policy on someone else? This alimony issue seems to fit the category of taking out money against someone elses life and seems to have just as much disconnect
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This is a sticky situation at best. I usually advise my clients to do the latter, but w usually discuss our options first. Most of the time, the premiums are not too high for the person receiving the benefits. I have found that allowing the person who will benefit from the policy to be in control of it decreases tensions across the board. I wonder if anyone here has encountered the problem that sometimes arises, where a contributing member simply stops paying into the insurance policy through some loophole in the agreement. It is important to ensure that the agreements are solid and well understood by all sides.
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I was unaware of this practice. I don’t consider myself an expert in divorce policy by any stretch, but I have not heard of this particular type of settlement. I think that it is very interesting, and makes a lot of sense now that I consider it fully. A few years ago a close friend of mine was involved in a very messy divorce, and unfortunately it ended with a situation that could have benefited from a policy like this. I will have to ask my friend if a life insurance policy of any kind was discussed in settlement. The versatility of this option makes it very impressive indeed.
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It’s a sad state of affairs when you don’t even trust your spouse enough to have a life insurance policy that’s not shared by both parties. It’s the same type of situation as a prenup– I couldn’t imagine having to ask a spouse to do something like this. It’s akin to telling the person “I love you, but I figure we’ll probably get divorced at some point.” The solution is not to marry someone unless you really love them. Obviously mistakes can happen, but if you date someone for 2 weeks and get married, and then you have to divorce, is that really any surprise? Be responsible when marrying to avoid these awkward situations.
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I can’t even imagine this. A divorced couple squabbling over a life insurance policy? Have people no shame?
I have been divorced once and I was able to keep things civil with my ex-husband. We were upset with each other, but at least we didn’t turn into animals. If you’re getting divorced, keep your cool and negotiate calmly with your ex. It will result in far fewer headaches for both of you and will probably result in you both getting most of what you want. Divorce is not easy, but you don’t need to make it harder.
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I think the most interesting part of this is that you can be ordered to have a life insurance policy on someone else by a court. I understand the purpose (if someone paying child support dies, you still need child support), but its just not something I would ever expect to hear about. Can courts also rule on how much that policy is for, because that locks parties into having to pay for a contract that the court does not normally control.
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Paula– how insensitive can you be? Yes, many people are able to keep civil with their exes, but many people simply cannot. In those cases, there is certainly nothing wrong with trying to protect your property and your investments. You are lucky in that you were able to stay friends with your ex. I have known many people whose divorces were very ugly, and it wasn’t by choice. Lawyers often coerce the two sides into being combative so they can get as much for their side as they can, and the pressure of divorce often drives people to do things they wouldn’t normally do. I also think it’s a shame when divorce comes to this, but to say it’s totally avoidable or that there is no need for the type of action brought up in this blog post is just irresponsible.
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Am I allowed to buy a policy on somebody without his consent? I doubt that my spouse would take out a policy on his own, but this sounds like a great idea. It would put me substantially at ease, and make things easier on all of us. It seems to me that unless he was there, I could not actually buy an insurance policy on him, and I doubt if I could talk him into sitting down with an insurance agent. I guess that my other problem would be his unhealthy lifestyle that may, in fact, lead to a premium that I quite frankly can not afford. Are there any policies that take this into account when setting prices?
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Why is this better than a trust fund? It seems to me that the money spent on the premiums would be better if dropped into a protected trust. This way all of the money is recovered, without having to deal with an insurance company. Additionally, a trust could be established to avoid misuse when the money is taken out (by directing money for education or the like). I know that there must be some very good reasons for an insurance policy, as it has worked well for many of my co-workers and friends, I am just curious about the specific reasons.
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Another option is to see if the life insurance company offers an irrevocable beneficiary designation. Sometimes if the other spouse won’t agree to insurance, even with a court ordered mandate, a good broker may be able to find coverage without their knowledge or consent. It’s a good idea to get life insurance quotes from a broker who might have multiple channels to work with.
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Having been through a divorce myself with life insurance naming my ex-wife as the beneficiary, I found your article very interesting and informative. Thank you for your insight.
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