Many of our clients come to us before divorce mediation with some type of life insurance. The question we hear weekly is “Can I keep the life insurance policy in the divorce?” Well, it depends. You can keep many types of contracts, but you need to know what you own before you decide who is keeping what. There are many variables in a life insurance contract and other questions you also need answers to. Are you the owner? Is there cash value? Can you remain as the beneficiary when you are divorced? It’s important to understand the parties and their rights in a life insurance contract, how your state treats ex-spouses, and the basic types of contracts.
The parties involved
The Owner – This is the person or entity who has control over the policy, can gather information on the policy from the carrier and has control to change beneficiaries. This person or entity has total control over the policy and unless blocked, can change the beneficiary at the insurance company level.
Annuitant – This is the person whom the policy is based on. If this person dies, a death benefit is paid. Often, the owner and annuitant are the same person, but not always.
Beneficiary – This is the person who receives the death benefit if the annuitant dies. A primary beneficiary receives the funds first. If this person dies before the annuitant or with the annuitant, the contingent beneficiaries receive the funds. In Texas, per Texas Family Code 9.301 in the situation of an ex-spouse who has not been re-designated as the beneficiary after the divorce, the ex-spouse will be skipped over and the other primary and/or contingent beneficiaries will be paid.
Paying a death benefit to the ex-spouse
In Texas, if a spouse was designated as a beneficiary before the divorce and not re-designated after divorce, and not designated in the divorce decree as the beneficiary of the policy, he/she is written out and/or skipped over by the life insurance company per Texas Family Code 9.301. For example, Tom purchases a 20-year term policy for $2 Million and named his current wife Susan as the primary beneficiary and their three adult children equally as the contingent beneficiaries. Seven years later Tom and Susan divorce and the policy remains unchanged. It’s a term policy worth nothing so it was, honestly, just forgotten in the divorce negotiations. It was not addressed at all in the divorce decree. A year after the divorce, Tom dies suddenly of heart failure. In this case, Susan may not receive the death benefit, the children may instead.
If Susan had been written into their divorce decree as the beneficiary of the policy the insurance company would review the decree and likely pay Susan, however, the interim stress and strain could all be thwarted with a new beneficiary designation with the insurance company after the divorce.
Irrevocable and revocable beneficiary
Even if the ex-wife is re-designated as the beneficiary after the divorce, the owner still has control to change a regular, revocable beneficiary – no matter what your divorce decree states. We strongly suggest the ex-spouse make you an irrevocable beneficiary if you want to remain the policy beneficiary. As an irrevocable beneficiary you cannot be written out as beneficiary without your consent. For example, let’s assume instead of dying a year after the divorce, Tom remarries Daniele. Tom makes Daniele the primary beneficiary after they are married, even though the Texas divorce decree states that Susan should remain primary beneficiary of the same policy. Then a year after marrying Daniele, Tom dies. We are still within the original 20-year term period only now the insurance company has a designation from Tom to pay his current wife Daniele, so they will likely pay Daniele. The divorce decree states that Susan should remain the beneficiary – so at the very least there is a fight on Susan’s hands and she may not in the end receive the funds at all. Had Susan and her divorce attorney mandated that Susan be designated the IRREVOCABLE beneficiary, there would be no confusion. Tom could not have made Daniele the new beneficiary or he would have had to open a new policy for Daniele alone.
Types of policies
Term Life – This is simply a term life insurance policy meaning you pay a certain premium for insurance for a certain term or period of time. If the insured dies within that term period, the beneficiary receives the death benefit. If the owner stops paying premiums, the policy lapses and is gone. There is no cash value with a term policy. The policy is worth nothing today and only worth something if the annuitant dies. This policy should be on your divorce estate spreadsheet, but the value is $0. It’s the death benefit that is worth something and conversely, costs something each month, and it should be discussed in the divorce negotiations especially if you still have minor children. While child support is typically an obligation of the estate, that obligation would be far less than a million or multi-million term life policy.
Whole Life Policy – This is permanent policy that pays either a dividend or a set interest rate. As with term life, regular premiums are due with whole life policies for a predetermined period. Whole life can grow over time, but it is costly in the early years. You pay a premium for the cost of insurance in the earlier years only to have that cost not rise in later years. These policies have cash value and should be listed with that value on your divorce estate spreadsheet. The policies should be discussed and negotiated for in the divorce. There is a monthly premium for these policies as well and that should also be discussed and negotiated.
Universal Life Policy – This is a permanent policy that, like whole life, has cash value. Universal Life policies are more flexible as there is no set premiums due. There were illustrations ran when the policy was purchased with what the parties agreed to pay, but no mandated premium payments. If you don’t pay the premiums, the policy will use the cash value to pay the premiums. If no premiums are paid, it will lapse only if there is insufficient cash value to pay premiums. Universal policies utilize some type of underlying investment – the investment can be a fixed rate, a mutual fund type of account in the markets or an indexed policy tied to the markets but unable to technically go below 0% if the markets have a down year. Most of the policies we use with our investment clients through our sister firm, French Financial Group, are universal life policies are they are more flexible, have better options for growth and can be morphed to use for either tax free cash later in life for the owner or death benefit for their heirs. This is certainly an asset to go on the estate spreadsheet to be discussed and negotiated.
An in-force illustration can be run on the universal policies and the whole life policies. These illustrations will show how long you have, based on performance and your specific contract parameters, to keep the policy and use the cash value for premiums. These illustrations take several days to run, so order them well before your mediation date.
If you have life insurance or other financial questions call us. We offer strategy sessions to help you understand what you own and develop a plan for your future.