Dissolving a marriage requires couples to grapple with many complicated issues, including property division, alimony, and child custody.
Unfortunately, in all the hustle and bustle of resolving these matters, many couples forget to address their life insurance policies, which can seriously affect their post-divorce financial situation.
To ensure this does not happen to your family, don’t hesitate to contact an experienced divorce lawyer who can discuss life insurance and divorce settlements with you before you file for divorce.
The Importance of Life Insurance Policies
Life insurance policies can play a key role in ensuring that a person’s loved ones are provided for in the event of his or her untimely death by paying out of a death benefit to named beneficiaries. However, these policies only remain effective for couples who end their marriages if:
- the parties modify policy ownership to reflect the change in marital status, and
- the parties change their beneficiaries.
Dealing with life insurance policies during the property division process is critical for divorcing couples, especially those with dependent children. Please get in touch with our legal team today to ensure you won’t lose your life insurance benefits upon divorce.
Who Retains the Policy?
Divorcing couples should consider how their investments, including insurance policies, will be divided once their marriage is dissolved. For instance, because Texas is a community property state, most assets accumulated during marriage must be divided equally upon divorce. This same rule applies to insurance policy premium payments as long as they were made during the marriage.
Upon divorce, the value of these premiums can then be split between the parties, and the policy proceeds will still be payable to the listed beneficiaries. The only exception to this rule applies in cases where an initial life insurance policy premium was funded:
- before the marriage took place, or
- with funds that can be traced to separate properties.
In these situations, a life insurance policy could be categorized as one spouse’s separate property, even if subsequent premiums were paid with funds or income earned or acquired during the marriage.
As a result, the full value of the insurance policy would go to the deceased party’s estate or beneficiary. However, the former spouse could retain a claim for reimbursement for the policy’s value that can be linked to the payment of premiums during the marriage.
Insurance Beneficiary Changes
Most couples list each other as their primary beneficiaries on life insurance policies. While this arrangement is appropriate and usually in a family’s best interests, it could cease to be so if a couple later decides to divorce.
Couples who find themselves in this situation and share children often choose to designate their children as their beneficiaries, who will receive the benefits in the event of their parent’s untimely death. In fact, under texas Law, a couple’s divorce will automatically invalidate any pre-divorce designation of an ex-spouse as a life insurance beneficiary unless:
- A divorce decree designates the insured’s ex-spouse as the policy’s beneficiary;
- The insured re-designates his or her former spouse as the life insurance policy’s beneficiary after a divorce decree has been rendered; or
- The insured’s former spouse is designated to receive the proceeds of an insurance policy on behalf of a dependent of either party.
However, it’s important to note that this exception does not apply to ERISA plans.
Accounting for Cash Value
Some life insurance policies, namely whole and universal life policies, accumulate value over time, so a portion of all monthly payments will enter a fund that increases over time. The balance of this fund is essentially a policy’s cash value, so as long as a policy is active, a policyholder could elect to forego the death benefit and collect the cash value.
The cash value of a policy is considered part of a couple’s net worth, so if both parties to a divorce list the life insurance policy, as well as its cash value, among their marital assets, each party should be able to collect half of the cash value from the policy upon dissolution of their marriage.
FAQs: How Life Insurance is Handled in Divorce Settlements in Texas
- WHAT HAPPENS TO A LIFE INSURANCE POLICY DURING A DIVORCE SETTLEMENT IN TEXAS?
A life insurance policy can be considered a marital asset during a divorce settlement, especially if it has a cash value. The amount handled existing life insurance policy may be divided between the spouses as part of the divorce decree, or one spouse may be ordered to maintain the policy with the ex-spouse and/or children as beneficiaries.
- CAN THE BENEFICIARY OF A LIFE INSURANCE POLICY BE CHANGED AFTER A DIVORCE?
Yes, the policy owner can change the beneficiary of a life insurance policy after a divorce unless the divorce decree specifically prohibits it. However, in some cases, the court may order one spouse to maintain the other spouse or children as beneficiaries of divorce life insurance, especially for child support or alimony purposes.
- HOW ARE TERM LIFE INSURANCE POLICIES HANDLED IN A DIVORCE SETTLEMENT?
Term life insurance policies, which do not have a cash value, are typically not considered a marital asset. However, they can still be important in a divorce settlement. For permanent life insurance policies, for example, a court may order the policy owner to maintain the policy to ensure financial support for children or an ex-spouse in the event of the policy owner’s death.
- WHAT HAPPENS TO THE CASH VALUE OF A PERMANENT LIFE INSURANCE POLICY IN A DIVORCE?
The cash value of a permanent life insurance policy is often considered a marital asset and may be divided between spouses during the divorce process. The exact division will depend on the specific financial circumstances of the case and the laws in Texas.
- CAN A COURT ORDER A SPOUSE TO BUY A NEW LIFE INSURANCE POLICY AS PART OF A DIVORCE SETTLEMENT?
A court can order a spouse to get universal life insurance or buy a new policy as a divorce settlement. This is often done to ensure that child support or alimony payments will continue in the event of the paying spouse’s death.
- WHAT HAPPENS IF MY EX-SPOUSE IS THE POLICY OWNER OF MY LIFE INSURANCE POLICY?
If your ex-spouse is the policy owner of your life insurance policy, they have control over the policy, including the ability to change the beneficiary designation. This can be addressed during the divorce proceedings, and the court may order the policy owner to maintain certain beneficiaries or transfer ownership of the life policy itself.
- HOW CAN I PROTECT MY LIFE INSURANCE INTERESTS DURING A DIVORCE?
To protect your life insurance interests during a divorce, it’s important to consider all life insurance policies as part of the divorce process. This includes understanding how much life insurance coverage is in place, who owns the policies, and who the beneficiaries of life insurance work are. You should also consider your future life insurance needs, especially if you have children or will receive alimony.
- CAN LIFE INSURANCE BE USED TO SECURE ALIMONY OR CHILD SUPPORT PAYMENTS?
Life insurance can be a financial safety net to secure alimony or child support payments. The court may order the paying spouse to maintain a life insurance policy with the receiving spouse or children as beneficiaries. Buying life insurance ensures that financial support continues even if the paying spouse dies.
Remember, every situation is unique, and these answers are general. Please consult a family law attorney for advice tailored to your circumstances.
Contact Our Divorce Legal Team for Assistance
Please call the Law Office of Ben Carrasco, PLLC at (512) 866-1131 today to learn more about how an experienced Austin, Texas divorce attorney can help protect your assets, including life insurance policies, during your divorce.