In Divorce: Life Insurance
There are two main considerations that people going through the process of divorce have about life insurance.
First, people want to know how the divorce will affect any life insurance policy or policies they purchased during the marriage. Is life insurance a marital asset? Should the policies be split? Can they change beneficiaries?
Second, people want to know whether they should ask for new policies as part of the divorce settlement, or if the divorce agreement does require court-appointed life insurance, how to go about buying it.
Should you ask for life insurance in a divorce?
There are three main reasons to ask for life insurance in a divorce:
• To protect spousal maintenance payments that you will receive
• To protect child support payments that you will receive
• To protect pension or retirement funds that you will receive
If you are seeking or have a right to any financial payments from your ex-spouse and would be hurt financially if the ex-spouse were to die, then it may make sense for you to ask for life insurance in the divorce to protect those payments.
Many family lawyers will advise that if one ex-spouse is required to give support to the other that they carry life insurance to ensure that those financial obligations are met even if the employed person dies.
Accounting for Cash Value of Life Insurance
Some life insurance policies, particularly whole life and universal life policies accumulate cash value over time. Each month when you make your premium payment, a portion of that money enters a fund that grows with interest. The balance of this fund is the policy's cash value. This is your money. At any point while the policy is active, you may elect to forgo the death benefit and instead take the cash value. This process is known as cashing out your life insurance policy.
The cash value from a life insurance policy represents part of your net worth. The most equitable thing to do is to list the life insurance policy, including its cash value, among the marital assets to be divided. In a common divorce situation where assets are divided evenly, this means you leave the marriage with half the cash value from the policy.
Is Life Insurance Taxable?
If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends or withdrawals you have previously taken.