Life insurance is always a good idea. Even if you’re on your own, you want to plan for end-of-life expenses in the event of your untimely death. You don’t want your parents, siblings, or extended family or friends to find themselves on the hook for covering funeral expenses because of your bad planning.
Of course, if you’re a young, healthy, single individual, life insurance may not top your list of priorities, especially if you’re on a tight budget. When you’re married and/or you have children, however, life insurance becomes a lot more important.
The last thing you want is to place additional burden on your spouse or children in your absence. They will already have to figure out how to carry on without your contributions to the household income, and you may leave debts behind. Adding to that stress by including thousands of dollars in funeral expenses is unthinkable.
You want to take steps to make sure that your family is cared for in your absence, that they have the funds to pay off your debts, if necessary, to pay for your funeral, and perhaps even to pay off a mortgage or see to expenses that your income would have covered.
What about when you’re divorced, though? Should you continue to carry a life insurance policy or let it lapse? Should you adjust your policy or take out a new one? Here are a few things to consider when it comes to your life insurance following a divorce.
Don’t Let Insurance Lapse
The most important thing when it comes to your life insurance is not to let your payments lapse, and the main reason is that it could impact your ability to gain insurance. This isn’t to say that you can’t get a new insurance policy if your old one lapses, but it’s going to cost you.
When you’re young and healthy, it’s easy to find low-cost insurance policies because the risk of death is relatively low. As you get older, you not only get closer to death, so to speak, but you may also develop health concerns or other risk factors that impact your ability to find the best rates for life insurance.
If you have a universal/whole life policy of some sort, you can maintain it indefinitely without rate increases. The rate you lock in when you take out the policy will remain the same forever as long as you continue to pay your premiums.
Once you miss a payment and allow the policy to lapse, however, you’ll have to renegotiate a new policy with your insurance provider, and the rate is going to increase. It’s not a question of “if” but “how much”.
There is a notable exception, and that is a universal policy that has a savings element included, such as an Index Universal Life (IUL) policy. With this type of life insurance, a portion of your monthly payment goes toward the premium while the rest is placed in an investment account that is managed on your behalf.
Should you let your payments lapse, money will automatically be drawn from the savings portion to cover the cost of premiums. Your policy won’t actually lapse until your savings has been exhausted, so you can pick up payments again at any time before that and continue to maintain your policy at the locked-in rate.
Changing Your Policy
Even if your divorce is amicable, you may not want your life insurance policy to go to your ex-spouse in the event of your death. In addition to changing the beneficiary on your bank accounts, retirement accounts, and other accounts that tend to automatically go to a spouse, along with the beneficiary of your will or trusts, you need to adjust the beneficiary of your life insurance policy to reflect this life change.
If you fail to change the beneficiary and something happens, like an automobile accident or illness that results in your death, the money from your life insurance policy will go to the named beneficiary – your ex-spouse. You might not think the matter is pressing, but consider that an accident could leave you incapacitated.
What if you live but you are unable to make your wishes known? If others, like your parents or children, have to care for you in the meantime, you would almost certainly want your policy to go to them when you pass away. By failing to change your policy in a timely manner, you may lose any say you have over who gets it. Instead of going to grown children, it could be paid out to your ex-spouse, and your children might never see a dime.
Leaving Your Policy As-Is
It is possible that you want an ex-spouse to remain the beneficiary of your life insurance policy. If you still have young children at the time of your divorce, you want to ensure that they are cared for in your absence, and the absence of any child support you might have provided.
By leaving your ex-spouse as the beneficiary of your life insurance policy, your children will have the financial support they need as they grow up. While you could change your policy to name a child as a beneficiary instead of your ex-spouse, this can be problematic.
Insurance providers won’t pay out to a minor on a life insurance policy. If you haven’t set up a trust to account for this and hold the money until a child comes of age, the court will have to appoint a guardian to administer the proceeds, and it will most likely be the other parent, your ex-spouse, anyway.
In addition, this will cost money, which will take away from what your child would have received. In other words, it’s probably best to leave your ex-spouse as the beneficiary or set up a trust so that a child (or children) can get the money later.
Creating New Policies
The only real reason to create a brand new life insurance policy is if you have a term policy. In this case, you may want to let the policy lapse so that you can create a new whole life policy at the lowest possible rate (before you age further) and name a new beneficiary.