When a couple separates, it is a tough time for both individuals. Everything that they would have built together would be dealt with differently. The division of liabilities and assets is one of the major financial decisions an individual makes after a divorce. When you opt for a divorce, amongst all the financial instruments you own, what happens to your life insurance? There is no one straight line answer, as it all depends on several factors.
When you would have bought a life insurance policy, your spouse is likely to be a part of it. After the divorce, depending upon different factors, here is what you can do or what can happen to your life insurance.
Changes in nominee
Typically, most people opt for their partners as nominees for their life insurance policies. The nominee of the policy may receive the sum assured after the death of the policyholder. During your divorce proceedings, you may ensure that you have removed your ex-spouse as the nominee. Instead, you can place any other family members or loved ones as nominees instead. Before the divorce proceedings conclude, you need to complete the life insurance divorce decree.
Changes in beneficiary
The beneficiary of life insurance gains financially for the policyholder’s life. They are typically the breadwinner of a family. Most spouses list each other as the beneficiary of their life insurance policy. However, when your assets are being settled in a divorce proceeding, you, as a policyholder, need to change the beneficiary to someone else with an insurable interest. Insurable interest means that the person will suffer direct financial loss from your demise.
As the name suggests, you cannot change this type of beneficiary no matter what the situation between you, the policyholder, and the beneficiary is. If your spouse is an irrevocable beneficiary, you cannot change the beneficiary even after divorce.
Married Women’s Property Act
If you, as a husband, file a simple Married Women’s Property (MWP) addendum while purchasing your life insurance, the insurance payout can be protected from debtors. Section 6 of the Married Women’s Property Act ensures that if the husband fills any MWP addendum, no debtors or lenders can demand any payout from his wife or even his ex-wife.
Child support and alimony
Depending upon the understanding of the spouses, they might have sole custody or joint custody towards their children. The benefits of life insurance do come in the picture, even more so if the non-custodial parent is the breadwinner. The policy here will help in case of the demise of the non-custodial spouse: the custodial spouse and children will receive the death benefit. This will ensure that the children would face no financial trouble in absence of the earning parent. If the custodial spouse is the primary earner, it makes sense to continue with the life cover as it is,since it can ensure that the family’s financial security is passed on. However, there have been cases where ex-spouses may find each other financially irresponsible. Here, they might exclude their spouse completely from their policy but still plan accordingly, so that their children are protected.
Cash value of life insurance
There are different life insurances you can choose from. There are some policies where you get cash value accrued throughout the course of the policy. Policies like ULIP or whole life insurance invest part of the premiums towards investments or saving instruments. The life insurance premium calculator offers clarity by providing information on the premium portion that will be used as investments, the portion that will be used as insurance, and the estimated returns on them. In case of a divorce, it is better to cash out the policy,as it can be dispersed evenly amongst the spouses as a part of the financial settlement during the divorce.
A policy holder chooses an assignee who will receive the benefits of life insurance as well as be entitled to the liabilities. Usually, a spouse selects their partner as the assignee of their policy. However, post your divorce, the best solution is to reassign the policy to someone else. It can be anyone else you trust and want to protect, be it your children, parents, or other family members.