When you are setting up your new life during a divorce, life insurance may not be the most pressing thing on your mind (ahem, we suspect it’s not on your mind at all!) and yet it plays a crucial role. Many of us don’t understand life insurance, nor recognize how necessary it is for protecting us in the future. It’s especially important to understand how divorce and life insurance go hand in hand before you finish negotiating your divorce settlement. We will give you a quick “Life Insurance 101” here, but you’ll definitely want to consult with a vetted insurance broker to make sure you have optimized your plans for the future.
What is life insurance and why do I need it?
If you are working and supporting a family, it’s important to have life insurance coverage. If you should pass away unexpectedly and the income your family relies on is suddenly no longer there … well, you see the problem. Life insurance would provide your family money to essentially replace what you would have made in salary. There are basically two kinds:
Term: This is for a designated number of years (10, 20, 30, etc.) If you pass away while term life is in effect, your beneficiary (ies) will collect the money in a lump sum. It’s a “use it or lose it” sort of policy.
Permanent: This policy is for a lifetime (and usually significantly more expensive). There are different types of permanent insurance including universal and whole. Which one you choose depends entirely on your needs and situation. (Again it’s best to talk with an insurance professional to decide.).
Why do divorce and life insurance go hand in hand?
If you are relying on maintenance (alimony) and/or child support payments from your ex to make ends meet, what would you do if something unexpectedly happened to him and he passed away? Getting a life insurance policy on your ex ensures that you would be able to manage financially should something happen to him. By the same token, if you are working, having life insurance on yourself ensures that you would be leaving your family with some money to replace your salary, should something happen to you.
On a related topic — please forgive our bluntness — what if one or both of you don’t die but get hurt badly enough that you can no longer work and earn a living? You should know that life insurance does not help in that situation. In that case you need to have something called “disability insurance”, another type of insurance you really need to understand and consider having in your divorce settlement. Disability insurance is essentially the same thing but it helps in the event of illness or injury. For the purpose of this article we’ll stick to divorce and life insurance (and address disability insurance in a later article).
So what are the 5 critical things to know about divorce and life insurance?
1. Securing life insurance does not happen quickly.
Life insurance takes some time (several weeks to months) to secure, so it’s important that you start the conversation early in your divorce negotiations. The insurance company needs time to evaluate your case in order to determine if they will offer you coverage and at what rate. This is based on your medical history (medical records or a physical exam may be needed) and your financial history (they may request a current credit report or financial statements for example).
2. You need the right amount of insurance.
The amount of protection you need must be evaluated by a pro. Your attorney will make suggestions based on spousal and/or child support to help you protect yourself and your family from the unforeseen. However, it’s always wise to consult with a good insurance broker to hear their professional estimates.
It’s important to consider other factors, such as your current income, earning capability and your current and future financial needs of the family. A trained insurance broker can help you think about other considerations such as education funding and retirement and pension considerations … things your attorney may not consider but may make a big difference in your situation.
3. You have to figure out how long you will be required to keep it.
You will negotiate into your divorce settlement how long you and/or your spouse are required to carry the coverage, which is why it’s important to get educated before the divorce document is signed. Again, it’s best to not simply reply on what your lawyer says but to diversify your knowledge base by talking with your insurance broker.
4. You will need to decide on a beneficiary.
The beneficiary is the person you designate to receive the money should death occur. Who the beneficiary (or beneficiaries) is should be predetermined in your divorce settlement. It’s also important to be specific in the policy about who owns it, who is required to pay the premiums, and who is allowed to change the beneficiary should the need arise.
5. It’s important to compare policies and prices.
Do not simply go with the cheapest rate (or allow your ex to talk you into that) because it’s important to understand what the policy provides for you and that, should anything happen, the company will take good care of you and the kids. This is not something you can just Google. You need a neutral party — a trained insurance consultant — to do that homework for you and present you with options.
We know, it seems a little grim to be talking about people dying or getting sick or injured but the reality is, we don’t know what life will throw at us. We doubt you saw the divorce in your future, back when you got married, so we don’t want you to be naïve as you negotiate your divorce settlement. This settlement is your financial future near and far, well into your retirement. Thinking about divorce and life insurance is a very strategic way to provide for your family now, should things take a turn later.
Did this article bring up questions for you? Jot them down and contact insurance expert, Lisa Horowitz, CLU, ChFC, who for nearly 30 years, has been dedicated to helping women understand how insurance can help them in every area of life including divorce, business and estate planning, retirement, life-altering illness, and caring for elderly parents. If you mention SAS for Women, Lisa will talk to you for 30 minutes for free, no matter which state in the USA you live. You can reach her at (718) 352-1311 or [email protected]