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It isn’t hard to think of a more pleasant combination of topics to write about than divorce and death, but here we are.  It is valuable to understand the three primary situations where life insurance needs to be addressed in a divorce. The first situation is when the couple has a whole life or variable life insurance policy purchased or paid for during the marriage and which has a cash value at the time of the divorce.  The second situation involves trying to protect a property right such as a retirement annuity that is a community asset and that will stop being paid out upon the death of one of the spouses.  The third situation is using life insurance to provide security to a spouse that is reliant on child and/or spousal support from the other spouse, and who would be placed in a very difficult financial situation in the event of the untimely death of the support paying spouse. Understanding each of these issues is important in determining if life insurance should be secured, cashed, or adjusted as you move through your divorce.

Before further discussing these issues, it is helpful to take a little time to understand the different types of life insurance.  To do so I took some time to sit down with Jorge Garcia ,  a friend and life insurance agent with New York Life.  Jorge outlined the three different types of life insurance; term, whole life, and universal life.  Understanding the functions of each of these options is valuable when each family considers obtaining insurance at any stage of life and especially during divorce.  Term life insurance is the most basic and common of policies.  A policy of term life insurance will be set up for a specified length of time and will provide for the payment of a lump sum amount upon the death of the insured to the designated beneficiary of the policy.   A set premium is paid to keep the policy in place.  There is no cash value in the policy except in the event of the death of the insured.  An example might be a couple just about to have their first child purchases a $1,000,000 policy of life insurance on the working parent’s life with a 25 year term and a semi-annual premium of $160.  If the insured spouse dies during the duration of the policy, the beneficiary, who may very well be the other spouse, will receive the $1,000,000 to help maintain the household in the absence of the support of the now deceased spouse.  If the insured spouse does not die during the term of the policy then at the end of the term there is no value in the policy.  The policy provided peace of mind but was not intended to be an investment with a cash value absent death.

The other two types of life insurance, whole life, and universal life, both have a death benefit component like the term policy, but also have a savings/investment component so that as time goes by the policy develops a value that is available while the insured is alive.  Whole life has a guaranteed death benefit that will never decrease, as long as premiums are paid. There is also the potential for dividends to increase the amount of coverage over time. Your premiums will also never change. For many, this reliability is the most important factor in their decision. The premium payment maintains this “term” type portion of the policy that provides a death benefit, but also includes a payment toward an investment value in the policy.  Universal life is similar to whole life but provides for flexibility in premium payments based on life circumstances and how much the insured is able to contribute to the policy.  It offers more control, but it requires oversight and doesn’t have a guaranteed death benefit like whole life. You can adjust your policy, and even your premiums (within limits), as your life changes. Without adequately funding it, your policy can potentially end since the death benefit is not guaranteed, but universal life often gives you the most long-term protection for your dollar.  One investment benefit of both whole life and universal life policies is that the cash value built is non-taxable so it can be drawn on to meet needs as they arise and not result in a taxable event.  The drawback to universal and whole life policies is the premiums are higher than term policies because they include contributions to the cash value component.

Moving back to our conversation about life insurance and divorce, we start with the first category which is the division of the community property interest in a life insurance policy at the time of divorce.  Given that term life insurance does not have a cash value in the absence of death, there is no property right to be divided with a term policy at divorce.  The property division discussion only applies to whole life and universal life policies that have accumulated a value.  Whatever cash value the policy has that was contributed to during the marriage is considered a community asset which is typically equally divided between the parties.  There is also the option to assign the policy to one of the spouses and the other spouse to receive another asset of equal value or for half of the policy value to be pulled out and paid to the other spouse.  The couple will also need to decide if they wish to keep the policy in place for any reason, or if it will be canceled once cashed out.

The second situation involves using life insurance to secure a property interest that will end upon the death of one party.   A good example of this is when a retirement annuity will be paid out on a monthly basis until the death of the party connected to the annuity.  Considering a more specific example, a military spouse may be employed for 20 years and at the end of those 20 years retire and secure a pension which will pay a monthly annuity amount until the military spouse dies.  If a portion of the pension was earned during the marriage then the other spouse would be entitled to one-half of the portion earned during the marriage.  At retirement the retiring spouse can elect survivor benefits which will allow for a percentage of the pension to continue to be paid to the other spouse in the event of the death of the military spouse.  If survivor benefits are not elected, whatever monthly portion of the retirement assigned to the other spouse will stop upon the death of the military spouse.  To address this potential outcome, the parties will either agree to the survivor benefit election if still available, or may agree to securing a policy of life insurance that will pay out a lump sum death benefit in lieu of the ongoing annuity amount.  Because it is securing a community interest, it is considered reasonable that the costs associated with securing the other spouse’s interest in the retirement would be a shared expense.  Working with a life insurance agent like Jorge Garcia for the couple to explore the most cost effective and reasonable way to secure the other spouse’s interest in the retirement annuity.  The unique characteristics and flexibility of a universal life policy might provide an economical and practical way to create a policy that keeps an appropriate level of insurance in place as the couple gets older but does not necessarily unjustly enrich a spouse if the death occurs later in time..

Perhaps the most common topic of life insurance with divorce is the issue of making sure everything is okay in life after the divorce.  In situations where one spouse makes more than the other and where there are minor children, one or both spouses may be reliant on each other to assure that their own needs and the needs of the children are met.  If one spouse is heavily reliant on child and spousal support to enjoy financial security in their home, the untimely death of the supporting spouse can create devastating financial problems.  To address this issue the couple can discuss either keeping any policies of life insurance they had previously secured in place, or they can explore obtaining insurance to provide for death benefits to assure financial stability in the event of death.  With children, the couple can consider mutually maintaining policies so that if one spouse dies the other has resources to meet the needs of the children to cover everyday  needs and possibly consider providing funds to help the children with college.  Couples will typically consider term policies to address child support and spousal support security.  There is no hard fast rule on who should cover these expenses.  With child support it is in both parents interest to assure that their needs are met in the event of an untimely death.  With spousal support it may be the supported spouse who bears more responsibility for providing for the security and perhaps  the other spouse commits to cooperating with the process of securing the insurance.  Working with a life insurance professional again allows for creativity in building a fair and cost effective policy.  For example, a term policy provides for a set amount of death benefits over the term of the policy.  If when a child is 10 a $500,000 policy covers their support for the next 8 years, when they are 17 a much smaller amount would be needed to cover the support amount for the remainder of time until they emancipate. Jorge Garcia mentions that perhaps a universal life insurance policy could be set up that has the death benefit gradually reducing until it zeroes out when support is no longer warranted.  This avoids a windfall when a death occurs closer to the end of the term and could result in setting up a less expensive overall policy.

I have thrown a lot of information out there in a short period of time.  Many couples I work with don’t have a complete understanding of what type of insurance they have, or don’t have insurance at all.  It is a valuable part of the divorce process to revisit the issue of life insurance, assess if any life insurance with cash surrender value is owned by the couple as an asset, and if there is any reason to explore continuing to maintain existing policies or get new policies set up.  Sitting down with a life insurance expert after having some basic understanding of the workings of the different types of policies will allow you to set something up that makes the most sense for you and your family, in whatever form it might take after divorce.