The more complex a family’s financial affairs, the more complicated it becomes during a divorce. The role of insurance during divorce is vital to the protection of both parties and the children of the marriage. Whether it involves life insurance, critical illness, disability or health insurance, all types of insurance can and should factor into a divorce settlement. If the marital assets include a business or recreational real estate properties, dividing marital assets can become emotional, complex and expensive. Insurance can help to simplify some of these intricacies.
Insurance for Spousal/Child Support
Often it is mandated in a separation agreement for spousal and child support that the paying party have life insurance to protect the interests of the receiving party in case of the payer’s death. The larger risk is to protect the receiving party’s interest in the event of a critical illness or disability. This is often overlooked and represents a much more significant risk to the recipient and the payer. If the family, now living in two separate residences are dependent upon one individual’s earnings, what happens to the family in the event the principal wage earner gets sick or is unable to earn a living? The burn-rate of one’s income becomes that much more significant when two residences are concerned. This could represent financial devastation for both households.
Cash Value of Life Insurance Policies
Another marital asset that may get overlooked is the cash value within a permanent life insurance policy. Yes, life insurance can have considerable cash value and often gets overlooked as a marital asset. This could be held personally or corporately. Depending on how you access the cash value in a policy is important because of the possible tax consequences. Cashing out a permanent policy is considered a deemed disposition and thus triggering taxable consequences. In some acrimonious divorces, this may be the only realistic solution. However, if you approach your financial advisor, they should be able to suggest a more tax-friendly solution in dealing with the cash value within a life insurance policy.
Health Insurance and Divorce
Coordination of benefits is virtually the same during divorce as in marriage, with the exception being the spouse is excluded from group benefits for a divorced couple. In the case where both parents work and have health benefits, the parent who has the earlier birthday in the year, pays for the children as the first payer. The balance of the children’s health and dental expenses will fall on the benefit plan of the second parent. All expenses incurred by the individual parent fall only on each owner’s plan.
Health Spending Accounts are not considered a benefit plan, thus fall outside this arrangement.
If a separation agreement warrants one spouse to pay for coverage of the other, the payer’s plan does not pay for the divorced spouse. Instead, the required payer should set up a separate individual plan for the divorced spouse.
Insurance Can Simplify Complex Needs
In cases where complex matters are involved such as investment or secondary real estate properties or relating to the assets of a business, insurance can help to simplify a settlement arrangement or avoid having to liquidate these assets. Not using insurance for these complex situations can be expensive because of the involvement of many professionals, potential tax consequences from deemed dispositions and emotional turmoil because of the liquidation of something like a family cottage.
Insurance Beneficiaries: Revocable versus Irrevocable
Many spouses don’t want to have their ex-spouses benefiting in the event of their death, so changing your beneficiary is important yet an often overlooked detail during separation and divorce. Provided that you set up your spouse as a revocable beneficiary (removable) versus irrevocable (non-removable), a simple call can change this to your insurance advisor. If you have your ex-spouse set as your irrevocable beneficiary, you will be unable to change this unless the policy is cancelled, lapses or your spouses agrees to the change in writing.
So if you don’t want to face this obstacle in the event of a marriage breakdown, always designate your spouse as a revocable beneficiary.
Insurance and Divorce
Insurance can play an important role during a divorce. Pay attention to the following areas of insurance when getting married, separated or going through a divorce:
- Child and spousal support insured from illness, disability and death
- Cash value of life insurance as a marital asset
- Health insurance during a divorce
- Revocable versus irrevocable beneficiary designation
Invest the time to understand its impact that insurance potentially has on your family while going through a divorce.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.