A life changing event, such as divorce, creates a pressing need to re-evaluate your finances, including life insurance.
Insurance matters may seem trivial next to the emotional upheaval of ending a marriage. But minding the details now can prevent financial pain later.
Often during divorce, an ex-spouse will be required to purchase life insurance, typically as a clause in the court proceedings – because financial dependence usually continues after a marriage ends.
There’s five essential steps you need to take to quickly purchase the best life insurance at the lowest price – for court-ordered life insurance.
UNDERSTAND COURT-ORDERED LIFE INSURANCE
What Is It?
Court-ordered life insurance is – life insurance that is legally mandated to be purchased. It is requested during divorce proceedings all the time.
Why Is Court-Ordered Life Insurance Common During Divorce Proceedings?
Mandated life insurance for divorce is often seen as financial protection on the life of the ex-spouse who pays child support and/or alimony (spousal maintenance). Should something happen to this ex-spouse, and the loss of the expected income occurs, it could be financially devastating to the family.
When Is Court-Ordered Life Insurance Mandated?
Specific to divorce proceedings, if there is a financial need established, say through child-support, court-ordered life insurance is typically awarded.
If the divorcing spouses have children, the mandate is more common.
What If I Ignore The Court-Ordered Life Insurance Clause?
In short, do not ignore a court mandate. Should you choose to not purchase the court-ordered life insurance, you will only incur additional legal woes.
While you likely won’t go to jail, it’s in your best interest to secure your life insurance quickly.
If you fail to maintain your life insurance policy, it’s possible your ex-spouse will be legally entitled to file a claim against your estate. Keep in mind, laws vary by state.
Seek legal advice should you have specific questions or concerns about your court-ordered life insurance.
2. EVALUATE YOUR LIFE INSURANCE REQUIREMENTS
Divorce creates unique needs for your life insurance. Before making a purchase, ask yourself:
- What is the best type of policy to purchase?
- How long do I need my life insurance to last?
- How much life insurance do I need?
What Is The Best Type Of Policy To Purchase?
More times than not, term life insurance is purchased for court-mandated life insurance.
Why? As the name implies, term life insurance lasts for a specific term, or set amount of time. Usually, a divorce decree will require life insurance coverage until certain obligations are fulfilled:
- Alimony (also called spousal maintenance)
Term life insurance is cost-effective and ideal for securing a larger policy size for a set amount of time.
Depending on your financial requirements or health, there are other types of life insurance sometimes purchased:
- Whole life insurance – Permanent life insurance, lasting your whole life. Not usually purchased for a divorce decree, unless the proceedings find a perpetual need for financial support.
- Graded Benefit and Guaranteed Issue life insurance – Typically purchased if serious health complications prevent you from qualifying for traditional life insurance. Policies are mostly permanent and for modest amounts. They are easier to qualify for.
How Long Do I Need My Policy To Last?
Again, term life insurance is almost always purchased for a divorce decree. Just how long of a term do you need to purchase? It depends.
You’ll want to pay attention to the details of your court-order. Often, the mandate will consider:
- How long the financial requirements of your children will last. Keep in mind, state requirements vary. For example:
- Some states allow child support requirements to end at the “age of majority” – 18 years old.
- Other states require your child support to last until high school graduation (your child may be older than 18 at that point).
- While other states require child support through age 21.
- Moreover – it’s possible child support will need to continue through the college enrollment of your child.
2. The amount of time you’re required to pay alimony
1. Usually, a set time period for alimony support is established during divorce proceedings.
Your life insurance should last as long as a financial need exists.
Let’s look at an example for reference:
Mark and Lindsay are finalizing their divorce. They share two children – Madison (8 years) and Dylan (11 years). Lindsay works part-time, while Mark provides the main source of income. Lindsay will have primary custody of their children. They agree for Mark to pay child-support until their youngest child completes high school.
Mark receives a court order to purchase life insurance and secures a term policy for 10 years to provide financial protection for his children.
How Much Life Insurance Do I Need?
The face amount (size) of your policy should be determined by your family’s monetary requirements.
Let’s revisit our example:
Mark earns $75,000 annually. Mark decides to purchase $750,000 in life insurance – an amount that would replace his income until his youngest child, Madison, turns 18 years old.
Make sure to select a face amount that would financially protect your family. For a general reference, consider taking your annual income and multiplying it by the number of years you will need to provide financial support.
$75,000 x 10 years = $750,000
Keep in mind, every situation is unique. A number of factors could influence the amount of life insurance to purchase, including:
- Children and ex-spouse’s current financial needs:
- Living expenses (i.e. utilities, food, bills)
- Debts (i.e. loans, credit cards)
- Children and ex-spouse’s future financial needs:
- College tuition
At the end of the day – You will want your court-ordered life insurance to last as long a financial need exists, and be for an amount that will cover at least how much you plan to pay over the course of your child support and/or alimony requirements.
3. INSPECT THE FINE PRINT (POLICY DETAILS)
Especially during a divorce decree, be sure to understand the details of your policy.
Consider The Parties To A Life Insurance Contract
You’ll want to be careful here, as the party designations can impact your policy. There are four main parties to a life insurance contract:
Owner – Holds the rights to the life insurance contract, including the ability to cancel the contract or change beneficiaries. Understandably, policy ownership has been known to create conflict in court-ordered life insurance. Potential scenarios to safeguard the integrity of the policy include:
Transfer ownership of the policy to the ex-spouse (custodial parent) OR
The ex-spouse’s name can be placed on the policy – for notification purposes. Should the policy lapse (premium payment is missed), they would be notified and be able to take steps to keep the policy in force.
Insured – The person whose life is insured by the policy. In this case, the insured would be the recipient of the court-ordered life insurance decree.
Beneficiary -The person(s) who will receive the death benefit upon the death of the insured. In this case, there are a couple of scenarios:
- Ex-spouse is beneficiary – most common and regularly recommended.
- Children are beneficiaries – be careful here. It’s not usually advisable to list children as primary beneficiaries to a life insurance policy. Life insurance proceeds are not paid directly to minors and additional arrangements must be made, such as setting up a trust with a guardian.
Insurer – The life insurance carrier providing the life insurance contract.
4. SECURE LIFE INSURANCE QUICKLY
Often during divorce proceedings, you are required to submit proof of a life insurance contract in a hurry.
Fortunately, there are options to purchase a high-quality policy with a rapid application process.
Consider purchasing term life insurance with no physical exam required.
What You Need To Know About No Physical Life Insurance
Also known as no exam or non med, life insurance without a physical is purchased all the time during divorce decrees.
Here’s why – You can quickly secure adequate coverage at a competitive price to satisfy your court-order, and skip the needles, nurses and liquid samples.
Expect a streamlined process that will look similar to this:
- Submit application (usually electronically)
- Participate in a phone interview, lasting 20 – 30 minutes. Plan on answering straightforward questions about:
- Basic information: name, date of birth, gender
- Your health history
- The health history of close blood-related family members (i.e. siblings, parents)
- Military status
- Tobacco and alcohol use
- Lifestyle and hobbies
3. Records review
1. Driving record
2. Prescription history
3. Medical Information Bureau (MIB) – an online database of previous insurance applications
4. Application decision
The entire process can take as little as minutes to complete.
Your premium rates (the amount you pay in exchange for life insurance coverage) are often highly competitive with medically underwritten life insurance policies.
5. PARTNER UP WITH AN INDEPENDENT AGENT
Partnering up with an independent agent ensures you are collaborating with someone who has your best interest at heart. Rather than being held captive to a specific company, they shop the top rated carriers to find the ideal policy to fit your specific needs.
Your life insurance requirements, as a result of divorce, are best handled by someone who has access to multiple companies and policies.
There are three key takeaways to keep in mind when you’ve received a court-ordered life insurance mandate for your divorce:
1. Remember the 5 basic steps to secure life insurance quickly:
– Understand what court-ordered life insurance means
– Determine your life insurance needs
– Read the fine print of your policy
– Know how to secure coverage quickly
-Partner up with an independent agent
2. Thoughtfully securing life insurance will protect yourself from additional legal woes
3. Protecting your beneficiaries with life insurance provides peace of mind