Divorce is one of life’s most challenging transitions, and it often brings a host of financial considerations that extend beyond property division and custody agreements. One area that is sometimes overlooked, but critically important, is life insurance. Whether you are the policyholder, the insured, or the beneficiary, divorce can dramatically alter the role life insurance plays in your financial plan.
During these transitions, it’s easy to focus only on surviving the day-to-day. But what if this season could also be a turning point — not just for your kids, but for you?
Why Life Insurance Matters in Divorce
Life insurance is designed to provide financial protection for loved ones in the event of a death. During divorce, the dynamics of who needs protection and who benefits from a policy may shift. For example, if children are involved, ensuring continued financial support—such as covering living expenses, education costs, and healthcare—remains a priority. Courts often address these issues directly, especially when child or spousal support is part of the divorce settlement.
Key Issues to Consider
1. Ownership and Control of the Policy
- If one spouse owns the policy on the other’s life, the owner has the ability to change beneficiaries, reduce coverage, or even cancel the policy. This can create complications if children or dependents still rely on that coverage.
- In some divorce agreements, courts require that policies remain in place, with ownership or beneficiary designations structured to ensure continued protection.
2. Beneficiary Designations
- Divorce does not automatically change your policy’s beneficiary. If you no longer wish your ex-spouse to benefit from the policy, you must update the designation.
- If minor children are named as beneficiaries, consider establishing a trust or appointing a guardian to manage the funds responsibly.
3. Court-Ordered Life Insurance
- In some cases, the court may order a spouse to pay child or spousal support to maintain life insurance as a way to secure future obligations.
- The required coverage amount often aligns with the projected total support payments, ensuring the family is protected if the paying spouse passes away unexpectedly.
4. Affordability and Adjusting Coverage
- Divorce can significantly change your financial situation. You may need to reevaluate how much coverage you need and what premiums you can reasonably afford.
- Term life insurance is often a cost-effective solution post-divorce, particularly when coverage is tied to the duration of child support obligations.
5. Estate Planning Integration
- Life insurance decisions should be coordinated with broader estate planning updates, including wills, trusts, and powers of attorney.
- Without alignment, there can be conflicts between what a divorce decree requires, what your policy designates, and what your estate plan outlines.
Practical Steps for Divorcing Spouses
- Review all existing policies—individual and employer-sponsored—to confirm ownership, beneficiaries, and coverage levels.
- Consult your attorney to ensure any required life insurance obligations are clearly documented in the divorce agreement.
- Work with a financial advisor to determine the right amount of coverage for your new circumstances.
- Update estate planning documents to reflect your post-divorce wishes and responsibilities.
Final Thought
Life insurance may not be the first topic on your mind during divorce, but it plays a vital role in protecting your family’s financial future. By addressing ownership, beneficiaries, and obligations upfront, you can avoid costly mistakes and provide peace of mind for those who matter most.
Jamie Blum, CPA, CDFA®
Director, Divorce Financial Planning and Litigation Support
Argent Bridge 2 Divorce (AB2D) provides divorce financial planning services. AB2D does NOT provide legal advice. All information provided is financial in nature and should NOT be construed or relied upon as legal advice. Individuals seeking legal advice should solicit the counsel of competent legal professionals knowledgeable about the divorce laws in their own geographical areas. Divorce financial planning is a fee-only process that does not involve investment advice, securities, or insurance transactions. Argent Bridge Advisors offers investment advice, securities management, and insurance services through a separate engagement.
