Insurance Products Need Special Care in Divorce

September 3, 2009 by wendy.

Most couples going through divorce are fortunate to have any life insurance.  Generally the most common type of life insurance is group term life insurance, usually through an employer.  However, some more affluent divorcing couples may have some complex finances, including Irrevocable Life Insurance Trusts, Estate Trusts, second-to-die life insurance polices, life policies with high cash values, and various annuities.  When dividing assets in divorce special care needs to be taken regarding these assets, whether the couple is using attorneys or if they are divorcing pro-se (or do-it-yourself). 

First, these types of assets are not as easy or simple as most people think.  The owner, the insured and/or the beneficiary may be different than one of the spouses believes.  If, for example, the wife is intending the a life insurance policy to “insure” spousal payments of any sort, and the beneficiary is changed or not reaffirmed after the divorce, the wife could potentially lose a great deal of money in the event of the untimely demise of the ex-husband.  Further, if a spouse is intending to use the cash value from one or more of the policies, the stock market fluctuations may have left the policy with no cash value, or worse, upside down and requiring payment of expensive premiums.

These types of assets were usually purchased as a solution to estate planning issues.  With the couple divorcing, the estate plans will need to be revisited.  Assets of this type may not be able to fulfill the original purpose – and may not need to do so after the divorce.  Couples considering divorce may need to carefully review if they have a need to continue these assets in the future, and if they have the income to continue making premium payments.  They may decide to cash out the policies – but will also need to consider any income tax issues that could result

Finally, people with these assets will need to carefully understand what they can and cannot do with them before they sign any settlement agreement.  One of my financial investment colleagues asked me how he was supposed to divide an annuity that one of his clients (a couple) agreed to split in their separation agreement.  Neither of the couple had contacted the annuity company to find out if dividing an annuity pursuant to a divorce was even possible.  I had to tell my colleague to call the annuity company.  The last I heard was that the company declined to separate the annuity – and have no more details. 

The bottom line is – if divorcing couples have life insurance, trusts and/or annuities, they may need to involve the expertise of a person who understands the financial complexity of these assets.  Making any mistakes can seriously cost divorcing people a significant amount of money – and possibly jeopardize their financial future – especially if one of the party is relying on insurance or annuity payments that they may not receive.

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