When it comes to life insurance, specifically, reviewing and potentially updating policy and beneficiary information should be the first step post-divorce. Most people who are married name their spouse as their primary beneficiary. Whether or not the divorce is contentious, they will likely want to update this to a new beneficiary. However, depending on the divorce agreement, there may be circumstances where the former spouse remains a beneficiary, as a way to provide financial support on the expenses they agreed to contribute towards.
Canadians can also name their children or other dependents as the primary beneficiary or beneficiaries. If the beneficiary is a minor, you will need to appoint a trustee, who would manage the funds of the trust until the child is old enough to do so.
You might also need to make further adjustments to the policy. It’s helpful to consult the professionals who are supporting you through your divorce, whether that’s your licensed life insurance advisor, estate planning specialist, accountant or lawyer. Some things to consider include:
1. Who will pay for the policy going forward?
To ensure your family’s insurance coverage stays intact, set clear expectations on who will pay for the policy. It’s worth noting that the owner of the life insurance policy does not need to be the same individual as the payor.
2. Is your insurance coverage sufficient?
After reviewing your financial obligations and identifying expenses that your former spouse is covering (partially or completely), does your life insurance policy provide enough coverage for your family? You may need to discuss purchasing additional temporary coverage if your debt load has increased. This applies to your critical illness and disability insurance policies, as well.
3. Is there cash value in the policy?
Some permanent policies accumulate cash value over time. The owner of the life insurance policy may decide to leverage the policy’s cash value as a loan for emergency cash-flow purposes or to fund a planned expense. The caveat is that the death benefit of the policy is generally reduced by that policy loan until the money is paid back. Whole life insurance policies typically have consistent premiums and generally guaranteed cash value accumulation, while universal life insurance offers flexible premiums and death benefits but with fewer guarantees. Universal life policies allocate a portion of your premiums towards the life insurance itself, while the remainder is divided between savings and investment components, which must be regularly monitored to ensure they are performing. Depending on the policy and its duration, the cash value of a life insurance policy may need to be considered as an asset in the divorce agreement.
In addition, reviewing your policy is important to keep track of payment cycles or any other conditions that may prevent your policy from coming into effect when needed.
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Step 3: Turn your focus to your future
Once you’ve sorted out your financial obligations and reviewed your insurance policies, it’s time to look forward. Here are a few steps that can help protect your future as well as the future of your beneficiaries in the case of a divorce:
A policy that insures your ex-spouse can be kept in force voluntarily, or you can get new policies to help provide financial protection for your dependents. This is especially important if you’re counting on your ex-spouse’s support payments for living expenses.
Recent divorcé(e)s may also want to consider disability and critical illness insurance. Life takes lots of unexpected turns, and these types of insurance can help ease your mind so you can focus on your family and/or recovery.
If a court orders it or if it’s integrated into your divorce agreement, a policy can be required to remain in effect as part of a divorce settlement or as part of a spousal or child support agreement.
A new policy may be issued to replace an existing policy because it better meets the needs of both parties.
Secure your own separate life insurance policy to ensure your children or other dependents are financially protected, especially if your ex-spouse’s financial situation isn’t stable. Life insurance coverage generally lapses when payments are missed.
Don’t be afraid to ask for help
You don’t have to do all of this alone. If you need help to organize your finances, divide up assets (including intangible ones like a life insurance policy) or explore new options, don’t hesitate to consult a professional. They can provide guidance and ensure you have proper protection for your family.
