While probably not immediately top of mind for most women considering divorce, carefully considering life insurance needs should be a part of the divorce process.
In fact, women should gather all the information they can on what types of insurance coverage they and their children have even before filing for divorce. For example, a vindictive spouse may try to cancel or change the beneficiary of life insurance prior to or after a final divorce settlement is reached. Consequently, these issues should be carefully addressed by your divorce attorney and your divorce financial planner so steps can taken to prevent this.
If my client requires continuing support or spousal maintenance as part of her divorce settlement, for example, I advise her to work with her attorney to prevent maintenance from being terminated upon the death of the payor. This requires that her divorce decree includes explicit language that guarantees the amount of support in the event that the payor dies prior to the expiration of the term
Experts advise putting verbiage in the decree to ensure spousal maintenance payable post-mortem or payable in an amount to guarantee the payor's obligations had he or she lived to the end of the stated term.
In addition, the decree should identify specific policies and beneficiaries so the divorced spouse is not left with, at best, a claim against the payor's estate instead of a claim against a specific policy.
I also advise my clients to include in their decrees that the payor execute an authorization letter permitting the payee, or his or her agents, to communicate directly with the life insurance company with regard to any aspect of the policy, such as notification of default, change of beneficiary, etc. If this isn’t done, the life insurance company will normally refuse to communicate with anyone other than the owner of the policy.
As part of the divorce settlement, clients in this situation should identify who is going to follow through on the life insurance arrangements and confirm everything in writing. At the very least, they should get proof of insurance before the decree is signed. If you are buying a new policy, be sure that it is in place before the decree is signed and the divorce is final. The insurance company requires that there be an “insurable interest." In other words, you cannot buy life insurance on an ex-spouse.
It is also a good idea for clients in this situation to get confirmation from the insurance company that it will honor the terms of the life insurance verbiage in the divorce decree as agreed. If the insurance company won't honor the agreement, then it may be necessary to take legal action before a divorce settlement.
As long as the policy isn’t a group term one, another option here is to consider designating the beneficiary as owner of the insurance policy, at least until the end of the spousal maintenance term. Of course, this will have to be negotiated as part of the final divorce settlement agreement. This will give the beneficiary control of beneficiary designation and paying premiums to keep the policy in force.
This article is designed to provide readers with a general overview of the issues discussed. Every divorce case is unique and those considering or going through divorce should consult with a board certified family law attorney and a certified divorce financial planner to ensure all specifics in their case are thoroughly addressed.
Join Patricia Barrett at her upcoming 2013 Houston Leisure Learning classes on November 11. She will also be presenting at the Guide to Good Divorce seminars throughout 2014. For more information on divorce financial planning or divorce mediation, visit Patricia's website, Lifetime Planning.