How to uncouple insurance policies in divorce
While most divorcing couples focus on the delicate and often difficult issues of child custody and dividing assets, breaking up can be hard to do in terms of your insurance policies, too. Whether the policies are in place for protection or as an investment, divorcing spouses need to review them in the context of their new financial circumstances.
Types of insurance to consider in a divorce
- Life insurance.
- Health insurance.
- Car and home insurance.
- Long-term care insurance.
- Disability insurance.
Your first step should be to check the beneficiaries on your life insurance, whether you have term or permanent policies.
"People sometimes forget the existence of their life insurance policies, yet often the amount of money involved is higher than their other assets," says Howard Hook, a CFP professional and accountant with Access Wealth Planning LLC in Roseland, N.J. "If you forget to change the beneficiary of your policy and you pass away, your ex-spouse could get the money instead of your new spouse."
Melody Juge, managing director of Life Income Management in Flat Rock, N.C., says splitting spouses should negotiate ownership of life insurance policies as part of the divorce settlement.
"If your spouse has an insurance policy that you're depending on to take care of you and your kids if he dies, you should have (the) ownership changed to yourself instead of your spouse," says Juge. "If not, your spouse could change the beneficiary or simply stop paying the premiums."
Hook says some divorcing spouses may need a new life insurance policy to ensure that money for child support or alimony would still be available if their ex passes away.
"Life insurance needs to be viewed in the context of the long-term financial obligations of each spouse," says Cathy Seeber, principal and senior financial adviser for Wescott Financial Advisory Group LLC in Philadelphia. "It should be in place to pay alimony, to pay off a mortgage, to pay for college for the kids or for the care of the couple's parents."
Seeber says the cash value of any permanent life insurance policies should be considered along with other assets during a divorce settlement.
Many couples share health insurance under one spouse's employee benefits package; a divorce will require a policy change.
When you work and have previously been covered by your spouse's company, you can generally obtain health insurance through your own employer after a divorce.
Also, the federal law known as the Consolidated Omnibus Budget Reconciliation Act, or COBRA, allows a person going through a divorce to stay on a spouse's group policy for a limited time. But you'd have to pay the full premium yourself.
"Spouses are entitled to 36 months of COBRA coverage, but extending your health insurance coverage that way can be costly," says Seeber. At the same time, "It's extremely important not to have a gap in your health insurance coverage, particularly if you have a medical issue or need mental health services."
Seeber says spouses who are not employed should negotiate during the divorce process to have their COBRA premiums paid by their ex and possibly to have additional money set aside for future insurance premiums, particularly if the unemployed spouse has been a stay-at-home parent and may face difficulty getting work.
"You also need to determine which spouse will provide your children's health insurance policy," says Hook.
Home and car insurance
Liability insurance policies for your home and car are particularly important to maintain during and after a divorce.
"Make sure your home insurance coverage, including liability insurance, is still in place even if you have moved out in anticipation of a divorce," says Hook. "If your spouse decides to eliminate liability coverage but your name is still on the deed, then you're still liable if anything happens to someone at the property."
Divorcing spouses should immediately notify their insurance companies if an asset such as a car or home changes ownership, Seeber says.
"You also need to be aware that you may lose discounts for bundling your car and home insurance with one company, insuring multiple cars, and even just for being married," she says.
"Look into how your insurance premiums may change, and incorporate that information into your estimated expenses before you finalize your settlement."
Long-term care insurance
Hook says long-term care insurance policies are individual insurance policies, so there would not be much impact from a divorce. But some insurance companies offer a discount for covering a married couple, and that would be eliminated after a split, he says.
Premiums for long-term care insurance should be estimated as part of your expenses during the divorce settlement. Hook suggests that divorcing spouses in their 50s who don't have long-term care coverage should be sure to purchase some.
"Long-term care insurance is especially important when you're single because you may not have anyone to take care of you, and you'll have to pay for whatever care you need from your own assets," says Hook.
Hook says people who are divorcing should be sure they have disability insurance because a disability can be harder to handle if you're single.
"The lack of a second income or someone to help you means that a disability will have a greater impact on a single person than on a married person," says Hook.
You can get disability insurance through your employer or privately, but you must currently have an income in order to qualify.
Typically, disability insurance policies pay only 60 percent to 70 percent of a person's income, so if a divorced spouse paying alimony becomes disabled and must collect benefits, the other ex may see his or her alimony reduced. Juge recommends having a provision written into a divorce settlement that addresses what will happen with alimony payments in case of a disability.