Can Life Insurance Survive Divorce?

On behalf of The Marks Law Firm, L.L.C. posted in Divorce, Maintenance, and Child Custody on Friday, May 23, 2014

At its core, life insurance serves a simple but fundamental need – to protect certain beneficiaries in the event of the untimely death of a financial provider.  A spouse or a child dependent on the continued income stream of a spouse or parent relies on a life insurance policy to assure their financial well being in the event the provider has an early death.

Because life insurance serves such a critical purpose in financial planning, most married individuals utilize life insurance to some degree. But what happens to these policies in the event of divorce?  Can they become a means to insure against loss of future expected streams of spousal or child support, or even a pension benefit?  Or will the former spouse and children find themselves suddenly very exposed economically?

It is important at the outset to understand that life insurance policies take many forms, but courts tend to see them in two categories:  term life policies which have no actual cash surrender value and a specific face value in the event of the death of the insured, and whole life policies which have both cash surrender value and a specific face value in the event of the death of the insured.  Because term life policies have no inherent cash surrender value, most courts treat them as the separate property of the insured.  By contrast, because whole life policies have an inherent cash surrender value, most courts view them as a marital asset subject to division – but often only to the extent of the cash surrender value.

Many of you might feel a bit unsure about such a seemingly harsh line on the value of life insurance, given its great import to the more dependent spouse whose livelihood depends upon continued receipt of spousal and/or child support.   But the seeming harshness results in how states have long considered life insurance.  Most states see life insurance policies as a contract between an insured and an insurance company, and our laws tend to protect freedom of contract.  Hence, if a married individual goes through a divorce, that individual has the freedom to change the beneficiary of any life insurance policy so that the proceeds go as the individual wishes, even if that works a hardship on a former spouse or children.

A few states, like New York, give courts authority to require an individual to continue holding a life insurance policy that would in effect insure the former spouse or the children against loss of spousal or child support in the event of the early death of the insured spouse with support obligations.  Missouri and Illinois, like most states, do not offer such statutory authority.  Does this mean the former spouse and children are at the whim of the insured spouse?

Not necessarily.

In every divorce, parties have room for negotiation.  Existing term or life policies have value to the beneficiary spouse and children, as they serve to remove the risk of loss of spousal or child support (or an investment asset that does not have survivorship benefits) so long as the face value of the policy is sufficient to cover the loss of support.  Also, policies become more expensive or difficult to procure as the insured ages – so maintaining an existing policy may be much less expensive than procuring a new policy.  Hence, while a court cannot require an insured to continue or obtain anew policies that benefit a former spouse or minor children, parties can contract, through a Marital Separation Agreement, to whatever arrangement they find mutually beneficial.  So, parties and their attorneys should consider all life insurance policies – even term life – as a valued asset subject to negotiation and settlement.  For instance, a beneficiary spouse may see a term life policy with sufficient face value as an investment against the insured spouse’s early death, and may consider that asset worth trading for some other asset on the table.  Or that beneficiary spouse may want only to allow the policy to continue and that spouse will pay the premium.  In cases where the insured spouse has a troubling medical history or may be somewhat older, thereby increasing the probability that spouse will die before paying all support obligations, continuing existing policies works as a boon to both parties, allowing the insured spouse to retain more current liquid assets in exchange for benefits to the former spouse through continued life insurance.

As this brief example illustrates, a simple term life policy secured early at a low rate with ease to change the face value can become a valuable asset during divorce, one that both the beneficiary and insured spouse should consider.  Too often spouses fail to see that a marital settlement agreement can become an excellent instrument of estate planning for both spouses and assuring the long-term financial well-being of the children.  Treating the settlement agreement in this regard could widen the possibilities of financial issues on the table and increase the value of certain assets thought to have little or no value, while reducing the value of other assets deemed of high value.  Even in the case of a small term life policy through an employer, the financial situation of the parties and the relative need for spousal or child support could turn that “zero value” policy into the most important asset at the time of divorce.

We suggest that all parties contemplating divorce consider including life insurance in all its forms as part of the asset pile for financial planning purposes alone.

If you have questions about life insurance and divorce, contact us – we can help.