Few life changes are of more consequence than a divorce. In addition to the financial and emotional difficulties, you'll face special
concerns about your insurance coverage. Planning for these changes should begin long before the divorce is final. The selection
of life and health insurance beneficiaries may have to be revised. If you have children, many of your insurance concerns will
center on whether you are granted custody. And because it's common while married for one spouse to maintain health insurance
for the family, the breakup of a marriage can have serious insurance consequences for the other spouse, especially if he or she
was not employed outside the home.
Protecting alimony and child support payments
The spouse given custody of the children (custodial parent) should make sure that the life of the noncustodial parent is insured. If
you're the custodial parent, you don't want to end up in a position where child support payments suddenly end because your
ex-spouse dies. The same thing applies to alimony payments. Life insurance can protect you and your children in case of untimely
death. Some agreements require the noncustodial parent to pay for a policy on his or her life and to name the custodial parent as
beneficiary. Your agreement should also state that you periodically receive proof that the policy is still in force.
If you're the custodial parent
If you're receiving alimony or child support payments, purchasing a life insurance policy on your former spouse is the easiest way
to protect yourself and your children. If you can't get new insurance on your former spouse, have his or her existing policies
transferred to you as the new policyowner and beneficiary. This can be planned as part of the divorce agreement. Make certain
that you are designated as the outright policyowner or as the irrevocable beneficiary. If you have trouble paying the policy
premiums, you can petition the court to have alimony and child support payments increased to cover the cost of insurance. The
court may even require your former spouse to pay the premiums. In this case, monitor the policy periodically to make sure that the
payments are being made.
If you're the noncustodial parent
Even though you don't have custody of your children, you'll want to ensure that they are protected financially. You may also have
certain responsibilities to your former spouse. Insure your obligations by paying for a new policy on your life for the custodial
parent. That way, you can keep any policies you currently have and protect your children's future at the same time. The policy can
be given to your former spouse free from gift tax if given either before or as part of the divorce agreement. If the policy is entirely
in your former spouse's name, any premiums you pay will likely be considered alimony for income tax purposes and are tax
deductible. You should also insure the life of your former spouse. Remember that if he or she were to die, you would most likely gain custody of the children, increasing your expenses dramatically.
Naming life insurance beneficiaries at divorce
Changing the beneficiary on a life insurance policy is as easy as calling up the insurer and requesting the appropriate paperwork.
You can designate any person or entity to be the beneficiary, although some states require that the beneficiary have an insurable
interest in your life (i.e., someone to whom you have a financial obligation). But during or after a divorce, your choices may be
If a court has ordered, for instance, that you must continue an existing policy with your former spouse as beneficiary, you cannot
change it. If you're under no such constraints, however, your choice usually boils down to either your estate, your ex-spouse, or
your children. Designating your estate as beneficiary will tie up the insurance proceeds in probate. And unless you need to protect
alimony or child support payments, you probably have no need or desire to name your ex-spouse. Designating your children as
beneficiaries may be your best course, but doing so can be very complicated if they are minors. One solution is to create a trust
for the children and name the trust as beneficiary.
Note: Divorce laws may differ from one state to the next, so consult an experienced legal professional before proceeding.
Health insurance coverage and divorce
Often, one spouse participates in a group health insurance plan at work that provides coverage for both spouses. When a divorce
occurs, coverage for the nonemployee spouse will often end, unless the divorce decree requires continuation of coverage. If there
is no such requirement, temporary protection may be provided by the Consolidated Omnibus Budget Reconciliation Act (COBRA).
This federal law protects employees of companies with 20 or more workers and their dependents from losing group insurance
coverage as a result of job loss or divorce. Certain governmental and nonprofit enterprises are exempt. If your former spouse
maintained family health coverage through work, you may (at your own expense) continue this group coverage for up to 36
months, or until you remarry or get coverage under another group health plan. Several states have enacted laws that may provide
a former spouse with more generous rights than those under COBRA.
Disability income insurance and divorce
If you receive alimony or child support, another risk to your income may arise if your former spouse becomes disabled. If he or she
has no disability insurance and is unable to work, the court may modify the alimony and child support obligation, reducing or
eliminating payments to you. With a disability policy, your ex-spouse will receive benefits each month and may be capable of
paying the same amount of alimony and child support. Planning for disability insurance should be completed before the divorce is
final. Unlike life insurance, you can't own a disability policy on someone else. So, the divorce decree may require that your
ex-spouse pay the premiums on a policy and that you are entitled to regularly receive proof that the policy is in force.
Property insurance and divorce
Real and personal property must be insured by the actual owner of the property (e.g., a car registered in your name must be
owned by you). So, property insurance policies must be modified or rewritten to reflect the proper owner as the insured. Also, if a
husband and a wife enter into an agreement covering their property rights, and divorce occurs within a specified period, all
transfers of property are considered made for full consideration and are not subject to gift tax. With respect to married
homeowners, the house can be sold immediately and the proceeds divided. Or, both spouses can continue to own the house
jointly with a view toward a future sale. Another alternative is for one spouse to keep the house and buy out the other's interest.
Or, the court may award the house to one spouse without trading assets while the title is held by both spouses. If the ownership is
changed, a new deed should be drawn up to reflect the new arrangement, and the homeowners policy should be updated.
If you move into an apartment (even temporarily), you should buy renters insurance to cover your possessions.
The opinions voiced in this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. To determine which investment(s) may be
appropriate for you, consult your financial advisor prior to investing. All performance referenced is
historical and is no guarantee of future results. All indices are unmanaged and cannot be invested
The information provided is not intended to be a substitute for specific individualized tax planning or
legal advice. We suggest that you consult with a qualified tax or legal advisor.
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N.A., an affiliate of LPL Financial.