There are so many critical issues that arise when a marriage ends. Going through a separation and divorce means dealing with major issues like child custody and support, alimony, and division of assets. Life insurance is another important issue, but it is often overlooked in the divorce process. Here are some things to consider when it comes to divorce and life insurance policies.
Who is the beneficiary of your life insurance policy?
Spouses often name each other as beneficiary of their life insurance policy. Once you separate, the beneficiary designation will likely need to be modified—especially if you do not have children. You may need to keep your spouse as beneficiary to secure support obligations (discussed below), but otherwise, there aren’t many reasons to keep your ex-spouse as beneficiary of your life insurance policy. If you don’t remove your former spouse as a beneficiary, he or she can get benefits even though you are no longer together. This can cause major upset for loved ones who survive you and tie up your estate in litigation (see a recent BC case where a common-law spouse of 30 years had to sue to get insurance proceeds due to partner’s failure to update a designation naming his first wife as sole beneficiary). To modify your life insurance policy’s beneficiary, you will need to fill out and submit a Change of Beneficiary form to your life insurance provider.
What happens to an insurance policy when you divorce?
The property regime under BC’s Family Law Act entitles each spouse to one-half of all property owned by at least one spouse at the time of separation. As such, a life insurance policy purchased during your marriage could be considered family property and subject to division on divorce. For example, the cash value of a life insurance policy built up over the course of your marriage is treated as family property. Not all insurance policies have a cash surrender value. If you and/or your spouse has insurance with an accrued cash value, options for dealing with the policy on divorce may include cashing out the policy and splitting the proceeds or keeping the policy intact but negotiating a settlement that includes its cash value (e.g., one spouse keeps 100% of the cash value of the policy in exchange for a lesser share in other family property).
Are you relying on your spouse for support payments?
If you have custody of minor children or are receiving alimony from your spouse, the obligation to carry life insurance should be included in your separation agreement or court order. The spouse making support payments should have a life insurance policy in place that names the other spouse as beneficiary to cover child support and/or spousal support obligations. Ideally, the beneficiary designation will be made irrevocable so that the spouse can’t change it. This will protect the spouse relying on the payments if the paying spouse dies. The amount of life insurance coverage that is appropriate will depend on your children’s ages and how much support is being paid. You should also factor in coverage for larger expenses down the road (e.g., post-secondary education for your children).
Are you the spouse paying support?
The obligation to make support payments does not necessarily stop when you die. Your estate may be on the hook if you do not make provision for future support obligations. This can cause problems for your executors and delay or hardship for your children or former spouse after your death. To prevent this, it is prudent to have a life insurance policy in place that names your former spouse and/or children (e.g., in trust to age 18) as beneficiaries. Ideally, your separation agreement will set out the terms and requirements with respect to insurance. If you are not able to agree, the court can order you to execute a new life insurance policy or continue your existing policy as part of your divorce to ensure that child support and spousal support payments are insured for a set period.
Contact us for advice on how to deal with life insurance when you divorce
Dick Byl Law Corporation has guided clients through the challenging process of separation and divorce for nearly 40 years. Life insurance policies are just one of the many issues to be considered when a marriage ends. It is so important to be prepared and understand all of your rights under family law. Reach out to us to book an appointment today. Our divorce lawyer provides trusted legal advice and practical strategies at each step of the divorce process.