After a major life event, like a divorce, it's important to re-evaluate your financial planning, estate planning, and other important documents that could have been affected by the change in your situation. Adam Robert, CFP®, APMA, and co-owner of Clute Wealth Management gives his insights and advice to help MoneyGeek readers think about their life insurance needs when going through a major change in your life like a divorce.
Read Adam's excerpt below - or read it on the MoneyGeek website.
How much life insurance does a divorced parent need?
There’s no magic number for how much life insurance a divorced parent should have — it really depends on your unique situation, which may be drastically different from your divorced neighbor.
- Your financial picture: Your insurance needs should be specifically tailored to your personal situation. Viewing your financial plan as a divorced person vs. a married one may alter your path forward. Your assets, debt and income may be very different from when you were married. It’s important to figure out how much you can afford, especially with the new financial path you’re on.
- Children’s needs: The amount of insurance you need also depends on your kids. How many do you have? How old are they? What kind of support do they need? These are key factors in determining how much coverage is right for you. For example, parents with several young kids may need more insurance, while parents with grown, independent kids could need less. In addition, if you have a child with special needs, you might need to set up a special plan (like a trust) to make sure they get the right support without losing any benefits.
What should you do about life insurance policy after a divorce?
Before you finalize your divorce, it’s smart to review your life insurance policies. Life insurance on one or both spouses may need to be included in the divorce agreement (either existing or a new policy), and each spouse should know the details such as the death benefit, premiums, cash value, certain policy provisions/riders and beneficiaries.
After the divorce is finalized, and if it is not needed to be pledged against alimony payments for your ex-spouse, you will want to re-evaluate the policy’s purpose and determine if you should continue the policy. You might want to:
- Change the beneficiary
- Lower the death benefit
- Adjust how much you’re paying in premiums
- Convert a term policy to a permanent one
- Let the policy go if you don’t need it anymore
Whatever you decide should fit with your new financial situation after the divorce.
Can you remove your ex-spouse from your life insurance policy?
Yes, in most instances it is fairly easy to change a beneficiary on a life insurance policy after a divorce. However, during a significant life transition, such as a divorce, it’s crucial to review your entire financial plan and re-evaluate all the moving pieces. Life insurance is often a significant piece of providing financial security for your family, whether to cover debts, replace earnings or cover future education costs to name a few reasons. Here are a few things to consider when evaluating whether or not you should remove your ex-spouse as the beneficiary:
- What kind of policy do you have and why did you buy it? Knowing the original reason you bought life insurance can help you figure out whether the beneficiary needs to be changed. There are different types of policies and extra features (called riders) that may be important. Plus, some policies have something called an "irrevocable beneficiary," which means you may not be able to change it very easily, if at all.
- How's your relationship with your ex? If you’re on good terms, you might agree to change beneficiaries — or maybe not! Some parents keep their ex-spouse as the beneficiary because they don’t want their kids to inherit a large sum of money directly. If you don’t have a trust set up to manage the money for your kids, this could make sense.
- Check your divorce agreement. This is a big one. Divorce agreements often spell out who the beneficiary needs to be, especially if there’s alimony or child support involved. Sometimes the agreement will say you need to keep your ex as the beneficiary to make sure they still get payments if something happens to you. But if there’s no requirement, you’re probably free to make a change. Just think about who else might need to be the beneficiary, like your kids, if there are. Do you have any estate plans or trusts in place? All of this should be considered before making a switch.
Disclosure
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This material contains only general descriptions and is neither a solicitation to sell any insurance product or security nor intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. Guarantees are based on the claims-paying ability of the issuing company.
