Dissolving a marriage requires couples to grapple with a host of 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 have serious consequences on their post-divorce financial situation.
To ensure that this does not happen to your family, please 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 the 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 who share dependent children. To ensure that you won’t lose your own life insurance benefits upon divorce, please contact our legal team today.
Who Retains the Policy?
Divorcing couples should consider how their investments, including any insurance policies, will be divided once their marriage is dissolved. For instance, because Texas is a community property state, most assets that are 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 proceeds of the policy 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 clearly be traced to separate property.
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, although the former spouse could retain a claim for reimbursement for the value of the policy 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 who share children often choose to designate their children as their beneficiaries, who will then receive the benefits in the event of their parents’ 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.
It’s important to note, however, that this exception does not apply to ERISA plans.
Accounting for Cash Value
Some types of 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.
Contact Our Divorce Legal Team for Assistance
Please call the Law Office of Ben Carrasco, PLLC at (512) 320-9126 today to learn more about how an experienced Austin, Texas divorce attorney can help protect your assets, including life insurance policies, during your divorce.