What Life Insurance Is, And How Does It Work in A Divorce?

Feb 09, 2024 By Susan Kelly

If you're concerned about your life insurance coverage after divorce, it's important to know the ins and outs when it comes to what will happen with this type of insurance policy. This post sheds light on some things that you may not have been aware of: from determining ownership to understand exclusions. It also provides tips for talking with a divorce lawyer, given the nuanced nature of life insurance contracts and how they might impact a lawsuit settlement.

What Is Life Insurance?

Life insurance is designed to pay out a designated beneficiary when the insured passes away. Most policies also allow for the policy owner to take loans against their policy and make contributions in order to build up cash value. The premiums paid into the policy are used to build up an investment portfolio that will be used to pay future claims (thus they are referred to as "investment" policies). Some policies even provide extra coverage if the policy holder dies while traveling overseas, as well as protection for your loved ones if you become disabled.

Life insurance is purchased from an insurance company and the premiums are paid to the company periodically. The mortality rate for each policy holder is used to determine how much you will have to pay for your premium. The rates are based on a number of factors, including your health and family medical history, age and gender. Some policies also factor in occupation and hobbies as well.

If you apply for life insurance coverage today, your future premiums will be based on your present health at the time of application. This means that if you are obese, a chain smoker, or have high blood pressure, your premium will be much higher than for a similar policy on an individual with healthy living habits.

How does Life Insurance work in a Divorce?

Divorce is never easy, but one thing that we can take comfort in is knowing our financial security won't be impacted by the split... right? While that sounds like a reasonable thought, the truth is life insurance coverage can be complicated if you're ending a marriage.

Life insurance policies can have a lot of stipulations and exclusions, so it's important to know the nitty-gritty details before choosing or cashing out on a plan. For example, one of the biggest question marks is how ownership in life insurance policies work in divorce.

Who owns your Life Insurance Policy?

Married couples often take out life insurance policies to protect their family against the financial fallout of untimely deaths. However, when a couple gets divorced, existing life insurance policies can often get tangled in the legal process -- especially if one party believes he or she is still owed money.

To get a better idea of how to handle life insurance in divorce proceedings, here are some key points and steps to consider:

Determine who owns the policy:

If a husband and wife both contribute to the payment of the life insurance policy, ownership will generally be shared by both parties. However, if one spouse pays for most of the premiums on his or her own, it's sometimes possible that he or she owns that policy. The best way to determine ownership is by reviewing the life insurance application.

Figure out which policies to cash in:

If you're going through a divorce, don't assume all of your life insurance policies are part of your marital estate. It's possible that you took out additional coverage separately, so you'll want to review each policy to make sure.

What Are the Different Types of Life Insurance Policies?

There are many different types of life insurance policies on the market and each one serves a different purpose. Here are the various types and how they would be relevant in a divorce situation below.

Term Life Policies:

The most basic type of policy simply pays out when the insured person passes away regardless of the cause. These policies have a very low cash value and will have only the premiums paid into them. They can be purchased at any age, but are most common among middle-aged people.

Whole Life Policies:

These policies pay out the value of the premium paid into the policy regardless of age, health or life expectancy rates. They are also known as "pay-as-you-go" policies as they are designed to pay out at death so there is no need for pre-funding in order to build up cash value. Whole life policies usually provide larger benefits than term life insurance, but generally will cost more each month to own because of their high cash value rate. Whole life policies are best suited for people with dependents who will be depending on them financially in the event of a premature death.

Universal Life Policies:

These policies pay out the full benefits no matter when they are paid out. They also allow the policy holder to make withdrawals against the cash value of their policy and, in some cases, add new premiums. However, universal life policies can have negative cash values and stop paying out if certain conditions are not met.

Variable Universal Life Policies:

Very similar to universal life policies but with more flexibility for investors as to what rate of return is possible and how a policy can be structured.

Final Expense Policies:

Traditional burial insurance that usually has a very low cash value and is purchased in fixed amounts. These policies are not designed to replace all of the future funeral and burial expenses, but just some of them.

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