Posted: Nov 1

Life Insurance and Divorce: What You Need to Know

Going through a divorce is undoubtedly one of life's most challenging transitions. Beyond the emotional toll, there are numerous practical matters to address—and your life insurance policy should be among your priorities. Many Canadians don't realize that divorce can significantly impact their life insurance arrangements, potentially leaving them with inadequate coverage or unintended beneficiaries. Understanding how to navigate life insurance during and after divorce is crucial to protecting yourself and your loved ones financially. If you're facing this situation, connecting with a Vistaplan advisor can help ensure your life insurance policy aligns with your changing needs during this difficult time. Reach out to us today.

How Divorce Affects Your Existing Life Insurance Policy

When couples separate, many focus on dividing visible assets like homes and investments, sometimes overlooking the importance of updating their life insurance policy. Here's how divorce typically impacts life insurance in Canada:

Beneficiary Designations

Most married couples name their spouse as the primary beneficiary on their life insurance policy. Following a divorce, these designations don't automatically change—even if your separation agreement or divorce decree states that all assets should be divided. Unless you take action to update your beneficiary, your ex-spouse could remain the recipient of your life insurance benefits. In most Canadian provinces, divorce does not automatically revoke beneficiary designations. This means that even after finalizing your divorce, your ex-spouse could still receive the proceeds from your life insurance policy if you pass away. Some people are surprised to learn that even a new will that excludes an ex-spouse doesn't override the beneficiary designation on a life insurance policy.

Policy Ownership

Many couples purchase joint life insurance policies or name each other as owners on their individual policies. After divorce, these ownership arrangements need to be reassessed:

1. For individually owned policies where your ex-spouse is the owner of your life insurance policy, they maintain control over the policy, including the ability to change beneficiaries or even cancel the coverage.
2. With joint life insurance policies, determining who will maintain ownership or whether to split the policy becomes a necessary consideration.
3. If you're named as the owner on your ex-spouse's life insurance policy that secures child support or alimony payments, you'll want to ensure this arrangement continues to protect your financial interests.

Premium Payments

When couples separate, questions often arise about who will continue paying the premiums on existing policies. If you've been covered under your spouse's employer-sponsored group life insurance policy, you may lose this coverage after divorce, creating a potential gap in your protection.

Updating Your Life Insurance Policy After Divorce

Taking proactive steps to review and update your life insurance plan is essential following a separation or divorce:

Changing Beneficiaries

If you no longer wish for your ex-spouse to receive your life insurance proceeds, you should update your beneficiary designations as soon as legally possible. This typically involves:

1. Contacting your life insurance company to request a change of beneficiary form
2. Completing the form with your new beneficiary information
3. Submitting the form according to your insurer's requirements

Some separation agreements may require you to maintain your ex-spouse as a beneficiary for a specified period, particularly if the life insurance policy is intended to secure alimony or child support payments. Always ensure that any changes comply with your legal obligations before proceeding.

Reviewing Coverage Amounts

Your insurance needs likely changed with your divorce. Without a spouse's income to rely on, you might need to increase your life insurance coverage to adequately protect your dependents. Alternatively, with fewer financial obligations, you might be able to reduce your coverage.

Key questions to consider when reassessing your life insurance plan needs include:

• Who depends on you financially now?
• Have your financial obligations changed?
• Do you have new responsibilities following the divorce?
• Has your income situation changed?

Converting Joint Policies

If you and your ex-spouse held a joint life insurance policy, several options are available:

1. Policy Split: Some insurers allow joint policies to be split into individual policies, though this may depend on the type of life insurance coverage you have.
2. Buyout Option: One spouse can take full ownership of the policy by buying out the other's interest.
3. Cash Surrender: In some cases, surrendering the policy for its cash value and then purchasing separate policies might be the cleanest solution.
4. Maintain Status Quo: Sometimes, especially when the policy benefits children, couples choose to maintain joint policies even after divorce.

Each option comes with financial implications, so consulting with both a financial advisor and your legal representative is recommended before making decisions about your life insurance policy.

Life Insurance in Divorce Settlements

Life insurance often plays a critical role in divorce settlements, particularly when ongoing financial obligations exist between former spouses:

Securing Child Support Obligations

When child support is part of a divorce agreement, a life insurance plan can ensure these obligations will be met even if the paying parent passes away. Courts often order the supporting parent to maintain a life insurance policy with the children or custodial parent named as beneficiaries.

Key considerations for life insurance benefits securing child support include:

• The coverage amount should typically be sufficient to replace the total expected child support payments until the children reach adulthood
• The policy should remain in force until child support obligations end
• The receiving parent may be granted rights to verify that premium payments are being made
• In some cases, the receiving parent may be named as the policy owner to ensure coverage remains intact

Protecting Alimony Arrangements

Similar to child support, if spousal support (alimony) is part of your divorce settlement, life insurance can guarantee these payments continue if the paying spouse dies prematurely. The life insurance coverage amount should ideally reflect the present value of future alimony payments.

Some divorce decrees specifically require:

• A minimum life insurance policy face value
• Regular proof that the policy remains in force
• Restrictions on changing beneficiaries without court approval
• Designation of the receiving spouse as an irrevocable beneficiary

Court-Ordered Life Insurance Requirements

Canadian courts have the authority to include life insurance requirements in divorce orders. When life insurance is court-ordered, the specifics should be clearly outlined in your separation agreement or divorce decree, including:

• Required coverage amounts
• Duration of required coverage
• Beneficiary designations
• Verification procedures
• Consequences of non-compliance

It's important to understand that failing to maintain court-ordered life insurance can result in legal consequences, potentially including contempt of court charges.

Special Considerations for Different Types of Life Insurance Policies

The impact of divorce varies depending on the type of life insurance policy you own:

Term Life Insurance

Term life insurance policies are often easier to address during divorce because they don't accumulate cash value. Options typically include:

• Maintaining the existing policy with updated beneficiaries
• Cancelling the policy and obtaining new individual coverage
• Transferring policy ownership as part of the settlement

When children are involved, maintaining term life insurance benefits until they reach adulthood is common, with the custodial parent often named as the beneficiary "in trust for" the children.

Permanent Life Insurance (Whole Life or Universal Life)

Permanent life insurance policies present additional complexities during divorce because they combine death benefits with investment components and cash values. These policies may be considered marital assets subject to division.

Options for handling permanent life insurance in divorce include:

• Cashing out the policy and dividing the proceeds
• One spouse keeping the policy and compensating the other for their share of the cash value
• Maintaining the policy with adjusted ownership and beneficiary arrangements
• Using the policy's cash value to fund part of the divorce settlement

The tax implications of these decisions can be significant, making professional guidance particularly important when dealing with permanent life insurance policies during divorce.

Purchasing New Life Insurance After Divorce

Many people find they need new or additional life insurance coverage following a divorce. When shopping for a new life insurance plan, consider these factors:

Assessing Your New Insurance Needs

Your financial situation and responsibilities likely changed with your divorce, affecting your life insurance needs:

• If you're now the primary caregiver for children, you may need increased coverage
• New budget constraints might affect how much you can spend on premiums
• Your health and age will impact the cost of new coverage
• Any court-ordered insurance requirements will establish minimum coverage amounts

Many financial advisors recommend conducting a comprehensive needs analysis to determine appropriate coverage levels for your new situation.

Affordability Considerations

Divorce often strains finances, making cost an important factor when purchasing new life insurance. To balance protection and affordability:

• Compare quotes from multiple insurance providers
• Consider whether term or permanent life insurance better suits your needs and budget
• Ask about riders or additional features that might provide value
• Look into group coverage through your employer
• Consider whether a combination of policy types might offer the best solution

Insurability Concerns

If you've experienced health changes since purchasing your previous life insurance policy, or if you're now older, you might face higher premiums or insurability challenges. Starting the application process early and working with an experienced insurance advisor can help address these concerns.

Practical Steps to Take During the Divorce Process

To protect your interests regarding life insurance during divorce, consider these practical steps:

1. Inventory existing policies: Gather details about all life insurance plans, including policy numbers, coverage amounts, beneficiaries, and cash values.
2. Review your divorce agreement: Understand any specific requirements related to life insurance in your separation agreement or court orders.
3. Consult professionals: Work with both legal and financial advisors who understand how life insurance intersects with divorce law.
4. Document changes: Keep records of all policy changes, communications with insurers, and premium payments.
5. Consider alternatives: If traditional life insurance becomes unaffordable or unavailable, explore alternative financial security arrangements that might satisfy court requirements.
6. Revisit regularly: As children age and financial circumstances change, regularly review your life insurance policy to ensure it continues to meet your needs.

Moving Forward: Securing Your Financial Future After Divorce

Navigating life insurance during and after divorce requires careful consideration of both legal obligations and financial needs. By taking proactive steps to update beneficiaries, reassess coverage amounts, and ensure compliance with court orders, you can protect yourself and your loved ones during this transition. Whether you need to modify existing policies or purchase new coverage, understanding how divorce impacts your life insurance arrangements is essential for your long-term financial security. If you're going through a divorce or have recently finalized one, speaking with a Vistaplan advisor can help you navigate the complexities of life insurance during this transition. Our advisors can help you understand your options, align your life insurance policy with your new circumstances, and ensure your coverage provides appropriate protection for you and your dependents moving forward. Contact us today. 

 

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