Divorce can be a complex and emotionally charged process, and one asset that often gets overlooked is life insurance. Whether the policy was taken out to protect a spouse, secure children’s financial future, or cover shared debts, it can be a significant part of the marital estate.
Understanding what happens to a life insurance policy in a divorce can help you make informed decisions and avoid unintended consequences.
Determining Ownership of the Policy
The first step is to determine who actually owns the policy. Ownership matters because the policy owner controls premium payments, beneficiary changes, and the right to surrender or sell the policy.
- Individually owned policy: If you took out the policy on your own life and pay the premiums yourself, it is typically considered your separate property. However, in some states, if the premiums were paid with marital funds, your ex-spouse may have a financial claim to part of the policy’s value.
- Jointly owned policy: These are less common but can be part of the marital estate and subject to division in divorce proceedings.
Beneficiary Designations May Need Updating
After a divorce, many people want to change their life insurance beneficiaries. State laws vary, but in many cases, a divorce automatically revokes an ex-spouse’s designation as beneficiary. Still, it’s critical to confirm and update the policy to reflect your wishes.
If children are the intended beneficiaries, parents often set up a trust to manage proceeds if the children are minors. Without this step, a court may appoint a guardian to oversee the funds.
Court Orders Can Require Ongoing Coverage
In some divorces, the court may order one spouse to maintain a life insurance policy for the benefit of the other spouse or the children. This is especially common if one spouse is paying alimony or child support. The idea is to ensure financial support continues if the paying spouse passes away.
If you are the one ordered to maintain coverage, it’s important to comply fully—failing to do so can lead to legal and financial consequences.
What if You No Longer Need the Policy?
In some situations, a life insurance policy purchased during marriage may no longer serve its original purpose after divorce. If the policy is no longer required by court order and you don’t want to keep paying premiums, you have options.
One option is selling a life insurance policy through a process called a life settlement. This allows you to sell the policy to a third party for a lump sum that’s typically higher than the cash surrender value but less than the death benefit. The buyer takes over premium payments and becomes the beneficiary.
Life settlements can be beneficial if:
- You no longer need the coverage.
- Premiums have become too expensive.
- You would rather use the policy’s value now to cover other expenses, such as medical bills, legal costs, or retirement needs.
- You want to fund part of the divorce settlement.
It’s important to work with a licensed life settlement broker or provider to ensure you get a fair offer and comply with state regulations.
Tax Considerations
Any changes to ownership, beneficiary designations, or the sale of a policy can have tax implications. For example, proceeds from a life settlement may be taxable, depending on your policy’s basis and the settlement amount. A financial advisor or tax professional can help you understand the potential impact before you make a decision.
Final Thoughts
Life insurance may not be top of mind when navigating a divorce, but it’s a key part of your financial picture. Whether you keep the policy, update beneficiaries, or consider a life settlement, make sure your decisions align with your long-term goals and any court requirements.
Careful planning can help you protect your assets, provide for your loved ones, and make the most of what you’ve built—both during and after your marriage.
