When you're considering life insurance in a divorce settlement, it's natural to ask, "Are life insurance proceeds marital property?" It's an important question, since both spouses must list their assets as part of the settlement process. The answer depends on what kind of policy you have. In most cases, term life insurance isn't considered an asset.
However, any permanent life insurance is usually counted as an asset because the policy comes with a cash value. Depending on your state, there may be some nuances involved. In some states, there may be wiggle room, depending on whether the permanent life insurance policy was purchased before you got married.
In that case, it may be considered a premarital asset and could potentially be protected during the divorce.
Term life insurance isn't considered a financial asset during a divorce, but that doesn't mean there aren't any changes that need to be made. Check to see who you've listed as your beneficiary. Most people choose their spouse as the beneficiary of the policy. But when you get divorced, you may want to make a switch. Contact your life insurance company and fill out the required paperwork to update your beneficiary.
Life insurance companies often prohibit naming your minor children as beneficiaries; they'll need to be at least 18 years old. Instead, you can create a trust for your children and name the trust as the policy beneficiary. Then, if you pass away during the term, your selected trustee will manage the funds until the kids reach an appropriate age to inherit the funds.
A permanent life policy works differently in a divorce because it comes with a cash value. Part of the ongoing premium payments go into a savings or investment account, which is considered a marital asset. Consequently, that cash value amount must be listed as an asset. Thus it'll be subject to negotiations during the divorce settlement.
If your situation dictates that all marital assets be split in half (either by the state or by agreement between the two of you), then the policy may need to be terminated to access the cash value. Then you'll each need to reevaluate your life insurance needs based on your new financial responsibilities.
If you receive alimony and/or child support from your ex-spouse, it's logical to think about the need for a life insurance policy on that individual. After all, if they pass away without a policy in place, you'll no longer receive that financial support. However, you can't just get a life insurance policy in that person's name. Instead, you must make a new policy part of the divorce settlement process. Work with your ex-spouse (and your lawyers) to get a quote on an appropriate death benefit and term length based on your new needs.
If you end up receiving alimony or child support, it's crucial to negotiate for your ex-spouse to take out life insurance in the divorce decree. The noncustodial parent should get a life insurance policy when kids are involved. Your lawyers can help negotiate the exact terms of the policy.
However, it's also important to remember that you don't control your spouse's premium payments. If they don't make their payments, the life insurance will lapse, and you (or your kids) won't receive any death benefit if they pass away during the term.
To protect your children's financial future, you should strongly consider getting your own life insurance policy. This doesn't help make up for alimony payments, but it's one step in maintaining control over your family's security.
There's a lot to negotiate during divorce proceedings. But don't discount the importance of life insurance. Whether you need to handle existing policies or want to ensure the security of your alimony or child support payments, talk to your attorney about the best course of action for life insurance during (and after) the divorce.
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