One topic couples often forget according to Davies & Co Lawyers is when making the decision to end a marriage are the insurance policies they owned or purchased during the marriage. In the upheaval of a divorce, child custody issues, choosing a family lawyer and property division, it’s important to remember these important assets. Each party should look carefully at the cash value of the policies and who are designated as beneficiaries.
What type of policies should you be looking for?
Health and Life Insurance: The most important are life and health insurance because they are the policies most commonly involved in child support and alimony orders from the court.
Disability: A close second in importance is disability insurance, although it’s less commonly a part of a divorce order.
Homeowners: Homeowners (sometimes known as “hazard” or “liability”) insurance, as well as renter’s insurance, is important to account for because it safeguards the parties residences which are often the major assets in a divorce.
Automobile: Finally, auto insurance is not only required by every state but also important to maintain as vehicles also become important in a division of assets.
A few definitions may also help when reading a policy:
Insured Party: this is the person whose life or property is the subject of an insurance policy.
Policy Owner: this is the person who owns the policy, and not necessarily the insured party. An example might be parents who own a life insurance policy on a child. The policy owner is the parent and the child is the insured.
Beneficiary: this is the person who is named as the payee (the person receiving money) of the insurance policy.
Premium: this is the amount of money the policy owner pays each month or year to keep the policy in effect. The money is paid to the insurance company.
Face Value: this is the amount the insurance company promises to pay if a certain event happens (death, disability, etc.).
Cash Value: Some insurance policies also have a cash value which builds over time. This usually happens with “whole life” or “permanent life” insurance policies.
Since life insurance is at the top of the list of important policies to account for in a divorce, you may need some more information about that type of policy.
In general, there are two types of life insurance: permanent or “whole life” and term. Whole life policies builds of equity or “cash value” as premiums are paid. After years of payments, it’s possible that the cash value of the policy might even exceed its face value (e.g., the face value of a policy might be $100,000, but because of payments over a long period of time, and compounding interest, the cash value of the policy could be $150,000).
Term policies, on the other hand, or only in effect for a set period of time, or a “term”. Once the term is over, there is no more coverage. These policies generally don’t build any equity or cash value, and the premiums are cheaper.
There are many uses for these two types of insurance before a divorce. With couple’s, spouses usually own policies insuring the others life. People may own life insurance to provide liquidity on the death of one of the spouses, and business partners often insure each other to provide funds for a buyout.
During the divorce it’s important to pay attention to the details. Most commonly, the person required to maintain (or purchase) the insurance is the party required to pay child support or alimony. The beneficiary of the policy is the usually the custodial parent. The reason is that in the event of death, the court wants to guarantee funds to continue alimony payments or child support.
Buying insurance isn’t always as easy as it may sound. During a divorce its important to know whether a person is “insurable”, some people’s health may make a policy impossible or much too expensive. Also, as time passes it may be possible to word a divorce order such that the amount of a policy can decrease over time (as the overall obligation of the payor decreases over time).
What kind of problems can occur with insurance? Here are a few things to watch out for:
Fraudulent changes: Many jurisdictions have “automatic orders” that go into effect on the filing of a divorce that prevents the spouses from making changes to insurance policies (among other things). However, some people make changes immediately prior to filing, knowing that after filing it will be impossible. It’s important to review and verify the status of insurance policies at the very beginning of a divorce, if there were changes made immediately prior to the filing courts will often force a party to restore the policies to the way they were.
Bankruptcy: Sometimes a bankruptcy can complicate a divorce. However, as long as the insurance is to secure alimony ordered by a court, it’s not dischargeable by the debtor. The more pressing problem in bankruptcy is that the spouse likely has no money and the best option may be for the custodial parent to maintain the policy and try for reimbursement later.
Lapsed policies: A “lapsed” policy is one where the owner let the policy terminate for because of non-payment. If this happens sometimes a court will order that the beneficiary will have a claim on the spouses probate estate, in the event of their death.
It’s important to pay attention to the various types of insurance in a divorce proceeding. Addressing these policies in the beginning of a divorce can save you a great deal of money and time.