A divorce has important implications for the life insurance policies held by you and your spouse. Not only does divorce affect the policies currently in your portfolio, but the court may also impose requirements for additional life insurance as part of your case.
Changing Life Insurance Beneficiaries
As you are aware, when you take out a life insurance policy, you must designate a beneficiary, the person to whom the policy will pay upon your death. Most couples have at least some life insurance and designate each other as beneficiaries.
When you get a divorce, you should review all of your life insurance policies with your financial team and change the beneficiaries to fit your life moving forward. Should you remarry, you will likely wish to name your new spouse as your beneficiary. Be sure to check with the individual life insurance companies where you have policies as each will have its own procedures and forms for beneficiary changes.
If your spouse is listed as an irrevocable beneficiary for your policy, you cannot make the beneficiary change on your own. Your spouse must consent to the change, or the court will order the change.
You may consider naming your children as your beneficiaries, but you should be aware that payment can't be made directly to them if they are minors.
Instead, you can choose three options:
- Designating payment to a custodian who will manage the funds for the children
- Directing that payment be made to a trust to benefit the children
- Naming your ex-spouse as the beneficiary to handle the funds for your children
New York State Law and Beneficiaries
It's common for life insurance to be overlooked with all the changes that divorce brings, and thus many people find themselves in a situation where they forget to change their beneficiary when they divorce. Years down the road, you could pass away. If you didn't change your beneficiary, your ex-spouse could still be listed as the payor on your life insurance policy, leaving your adult children or new spouse without the benefits you assumed they would receive.
New York state law recognizes this common problem. It states that upon divorce, your spouse is automatically revoked as the beneficiary on your life insurance policy unless your divorce decree states otherwise. This provides protection should you forget to change the beneficiary. However, in this instance, it will then be up to the probate court to determine to whom the policy should be paid upon your death since you did not name a new beneficiary yourself. To avoid this problem, it is best to change the beneficiary yourself so that you can choose where the payment goes and have control over it.
Jurisdiction over Life Insurance Policies
Most life insurance policies that are not simple term life policies carry a cash value for which the policy can be exchanged during life. This cash value is a marital asset and must be considered part of your divorce’s property distribution.
Because of this, New York requires that once a divorce petition has been filed that neither party change beneficiaries, cancel, or fail to pay on any existing life insurance policies. The policies fall under the court’s jurisdiction and must be preserved until the court can decide how to distribute or change them.
Life Insurance for Child or Spousal Support
The divorce court has control over what happens to your existing life insurance policies and also has the authority to require you to take out new policies. When child support or spousal support is ordered as part of your case, the court creates an ongoing responsibility for you to provide financial support for your spouse or children.
In the case of your children, the requirement extends until they reach majority. For your spouse, It may be a set term of years, or rarely, for their lifetime. In either instance, the court determines that your spouse and/or child needs financial support from you in the years to come.
Should you die before your child reaches majority or before your spousal support obligation term is met, your family will be left without those ongoing payments for their support. Because of this possibility, the court has the authority to require any order of spousal support or child support to be accompanied by a life insurance policy that will pay the total amount of all support that will be owed to the spouse or to the child. This creates a safety mechanism so that if you die before you finish paying support, your ex-spouse or child will still receive the funds for their support.
Suppose you are ordered to obtain life insurance in this situation. In that case, it is important to begin the process quickly because it can take four to six weeks for a policy to be issued and may involve a physical exam. You will be required to provide proof of the purchase of the policy to the court or to your spouse's attorney.
If you are a spouse who will be receiving spousal support backed by life insurance or if your spouse is required to provide life insurance to secure child support, you may wish to be listed as having third party authorization on the policy. This gives you the ability to check on the policy’s payment status and health to ensure that your ex continues to keep the policy up to date, in force, and with the beneficiaries required by the court. Doing so ensures that you have time to take action if your spouse stops paying on the policy or tries to change the beneficiary.
Life insurance can be an important part of your financial portfolio, and understanding how it is impacted by divorce can help you make informed decisions as you plan for your post-divorce life.