Life Insurance and Divorce: What You Need to Know
Life insurance is a critical part of any financial plan, but it’s especially important for anyone who wants to protect their family and dependents in the event of a catastrophe. As such, it’s important to know how life insurance works in the event of a divorce.
How Is Life Insurance Treated During Divorce?
While many factors can affect how your life insurance benefits are divided upon divorce, the general rule is that term life insurance is generally treated as a separate property when a married couple dissolves their partnership.
This means that if you own a policy on your own life and take out an individual plan, your ex-spouse will not be able to claim any portion of your payout in the event of your death.
However, with permanent plans such as whole life or universal life, there is some question about whether these policies should be considered marital assets or not.
Some states treat these policies as community property, while others consider them separate property belonging only to the person who purchased them.
Handling Life Insurance Post-Divorce
After a divorce, your first instinct might be to cancel your life insurance policy altogether, but that’s not always a good idea. There’s little reason why you should stop paying for coverage because you’re going through a divorce.
If you have children, life insurance is an excellent resource to protect them should something happen to you as their caregiver.
Updating Your Life Insurance Policy
Suppose that you have a life insurance policy through your employer or an individual policy purchased on your own. In that case, you may need to update it to remove a former spouse as the beneficiary of the policy. If you are married, it’s important that both spouses sign the application to designate beneficiaries in the event of death.
Consider maintaining a life insurance policy on your ex-spouse that is substantial enough to cover the amount he or she pays in child support or alimony. Keep this policy in place until your child is fully grown and will no longer require as much financial support.
If you don’t have any children or other dependents who rely on you financially, it may make sense to look into term insurance — which offers low premiums in exchange for limited coverage.
If term insurance doesn’t meet your needs, consider whole life insurance — which provides more coverage but costs more money over time because of its fixed interest rates (which aren’t adjusted based on inflation).
Get Help from Michigan’s Family Law Experts
At Gucciardo Family Law, we understand that navigating life post-divorce can be a challenging and emotional time. Managing a life insurance policy in the event of marital dissolution can be confusing, and it’s important to know how to handle your assets.
Our team can help – contact us today to learn more about what we can do to help you understand how to manage your life insurance policy and other assets during your divorce.
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