If you are going through a separation, it’s important to know what happens to life insurance after divorce or after dissolution of a civil partnership. But this is one area that is often overlooked when discussing other financial aspects of divorce, such as amending your will or offsetting your pension.
Marcia Mediation’s expertise across divorce mediation and financial mediation means we are in the perfect position to help you navigate the complex waters of this kind of issue. So, does life insurance affect divorce negotiations, and what are the factors to keep in mind when adding your life insurance policy into your financial settlement? In this guide, we will answer some of the common questions on this topic, to remove some of the mystery and give you more confidence in how to proceed.
What happens to life insurance after divorce depends on the type of policy you have. In many cases, married couples take out joint life insurance policies, which can be more complex to divide during divorce.
If you each have your own solo life insurance policy, or if only one of you has life insurance, then it should be possible to keep the policy in place.
However, you might want to change the named beneficiary on your policy, if it currently plans to pay out to your spouse. You can speak to your insurer about this before, during or after your divorce.
If you have a dual life insurance policy, there are a few options to consider. These include splitting the policy into two solo policies or transferring the whole policy into a single name.
Some insurers offer ‘separation benefits’ when you set up your life insurance policy, to make it easier to split into two later. You should check whether this is an option available to you or whether you would prefer to start a new sole life insurance policy in your own name anyway.
If your ex-spouse is the named beneficiary on your life insurance, they will usually receive the money when you die, even if you are divorced. This is different from inheriting via your Last Will and Testament. Even if your will names your spouse as a beneficiary, divorce effectively removes them, and your possessions are then divided between remaining beneficiaries as if your ex were already dead.
Because of this, for some people, it’s even more important to know what happens to life insurance after divorce, so that you can make the necessary changes to prevent your ex from claiming.
Yes. Again, there are several options to update life insurance after divorce and remove your partner as the named beneficiary. Single life insurance policies can often be updated or replaced, without losing any entitlements you have built up through past payments. Check your policy wording and speak to your insurer to make sure. Joint life insurance policies may be split or replaced with two solo policies. This may be easier if your policy includes separation benefits.
A third option is to place your life insurance policy into a discretionary trust, which allows you to change the named beneficiaries/trustees. You might want to consider this option when setting up your after-divorce life insurance, if you think your circumstances could change again in the future. Financial mediators like Marcia Mediation can help you to decide the best way to proceed. When splitting a joint life insurance policy, both parties must agree, so it’s a good idea to keep negotiations amicable.
Again, it depends on the terms of your policy. Most joint life insurance policies require you to be in a marriage or civil partnership with the joint party, so you will probably need to split or replace a joint life insurance policy after a divorce. In some cases, moving out of the marital home can have an immediate impact on your life insurance policy, so if you are living apart during your divorce proceedings, this can make your life insurance an even more pressing issue.
Generally speaking, it’s only a good idea to keep an individual life insurance policy where your ex-spouse is not the named beneficiary, either because you have been able to update the policy, or because it is held in a discretionary trust. The exception to this is if, for example, you had a life insurance policy that named your children and not your spouse. In this case, it may be quite reasonable to keep the exact same policy wording in place during and after your divorce.
In theory, there is no time limit for an ex to claim life insurance after divorce. As long as they are the named beneficiary, and you continue to pay the monthly or annual policy premiums, the contract remains valid.
You might even want to keep your policy in place, for example if you are on amicable terms and/or you have young children together, you might be happy for your life insurance to pay out to your ex to help cover future childcare expenses.
This brings us back to the question: “Does life insurance affect divorce?” Although having life insurance in place usually does not directly impact financial negotiations during divorce, you could argue that the potential payout is a kind of asset, and the past premiums you’ve paid in are a kind of marital expense.
If you want to try to factor life insurance into divorce negotiations in this way, speak to your family mediator at Marcia Mediation, and we can help you to understand what’s possible, what’s reasonable, and what’s not.
Because there is often no direct impact on life insurance after divorce, you may not need to do anything to ‘protect’ your policy. For example, a sole life insurance policy with your ex as named beneficiary might not need updating in order to keep their entitlement to a payout. On the other hand, joint life insurance policies can be harder to keep in place after separation, since they are often based on you living together as a married couple and/or in a designated marital home. Again, speak to Marcia Mediation financial mediators and we will be able to help you decide what needs to be done to protect your life insurance during divorce.
For a free, no-obligation initial consultation on this or any other aspect of divorce and family finances, contact Marcia Mediation today.
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