During the divorce process, spouses are prohibited from letting a life insurance policy lapse or changing the beneficiaries absent a written agreement or by order of the Court. This is to maintain the status quo concerning each party’s property rights while the terms of the divorce or separation are determined. However, new considerations exist for preserving life insurance once a divorce or legal separation is finalized. Typically, the final dissolution order or separation agreement addresses what happens to life insurance after divorce or legal separation.
When Is Life Insurance Required Post-Divorce or Separation?
Life insurance may be required by the Court or agreed to by the parties as security for a party’s alimony, child support, and/or college payment obligations. If the spouse paying support dies, the recipient will receive the insurance proceeds.
The final dissolution order or separation agreement will state who pays for the insurance and how much insurance is needed. Generally, the amount of life insurance is based on the support obligations owed.
How Can Life Insurance Be Verified?
The party maintaining the life insurance policy must provide proof of coverage periodically, including the amount and the beneficiaries, to ensure that the agreed-upon insurance coverage is in place. Typically, the dissolution order or separation agreement will state that proof must be given at least once a year, usually when the policy is renewed. Where the order or agreement does not specify a period, the other party must follow up to confirm the policy is still active. If proof is not provided, or the party required to get insurance lets the policy lapse, the other party must go to Court to enforce the agreement.
Including a provision in the dissolution order or separation agreement may be beneficial that the life insurance company must notify the non-insured party if the premium is not paid on time. Further, it should specify that the non-insured party can pay the premium and then seek reimbursement from the insured party. This keeps the policy from lapsing because it may take too long to go to Court to force the insured party to pay the premium within the grace period.
Can Life Insurance Requirements Be Modified?
Generally, life insurance obligations are modifiable if there is a substantial change in circumstances, such as job loss, disability, or other situations.
In addition, a party may seek modification where the support obligations have been reduced, so the party is now over-insured. For instance, a divorce agreement may provide for payment of alimony for ten years. The payor spouse would be required to buy life insurance equivalent to 10 years of alimony. As those years pass, less money needs to be paid out so the insured party can seek to reduce the amount of insurance. However, life insurance often secures multiple obligations to both the former spouse and children. As a result, it is important to calculate how much is owed to all parties before seeking to modify life insurance.
If you have concerns regarding life insurance in your dissolution order or separation agreement, contact us to discuss how we can help protect your rights.