We’re all aware of the scary statistic that 40 to 50% of married couples in the United States divorce. Yet many people don’t also realize that divorce reduces a man's standard of living by 10% and a woman's by almost 30%.
For these reasons, among others, it’s essential for couples to understand how life insurance plays into a divorce settlement. This is especially the case since insurance is an often neglected area of financial planning, since many people don’t realize it’s an important risk management and wealth accumulation tool.
When people go through a divorce, life insurance is often required. This can add to an already stressful situation. The purchase has to be made in a timely fashion, which can be difficult when a couple is already under so much pressure. The premium must also be reasonable since a considerable amount of money is being spent on the settlement. And, if either spouse has a high-risk medical condition or hobby, obtaining coverage might appear difficult or impossible. Yet despite all this, the agreement can’t be finalized without a policy. Yikes!
Fortunately, you can make your purchase less troublesome. Here are three tips for making the process as smooth as possible. (For related reading, see: How Life Insurance Works in a Divorce.)
Get Prequalified for Coverage
Your broker should quote you the most appropriate company, product and price before you submit a formal application. You should be able to go through underwriting feeling confident with an approval at the rate quoted.
In order to do this, he or she must pre-underwrite you and identify all of the underwriting challenges you pose. Only then can the most competitive carrier be selected. Not only that, the selected carrier must commit to a rate assuming the information collected in underwriting does not contradict the preliminary disclosures.
Prequalification sets the stage for more than a satisfactory outcome. It also helps underwriting move faster because any issues that can potentially cause delays have already been addressed.
Finalize All Legal Documents
There is nothing worse than having an underwriter approve your application at the rate quoted, but you can’t have the policy issued because your legal documents aren’t in order. These documents are important because they secure your legal and financial interests. They can influence the ownership of the policy, the manner in which the benefit is distributed and how any cash in the policy would be accessed.
If your divorce decree, the life insurance trust, the bank account, and all other tools are not in place, then the coverage cannot go into force and you run the risk of an emergent medical condition, lifestyle change, or other factor making you ineligible for coverage or disqualified entirely. This can severely complicate any divorce agreement. (For related reading, see: How to Protect Your Retirement After a Divorce.)
Keep Things Simple
When people typically engage in life insurance planning, they like to look at the big picture. They prefer to identify all the potential needs for coverage—personal, business, charitable. They then formulate an overall strategy for meeting these needs. This allows them to choose a policy or policies that are the most cost-effective.
Sometimes, however, we develop single needs for life insurance. A policy to meet the obligations of a divorce decree is an example. It is usually easier to take out a policy for this purpose that is separate and distinct from the policies that meet your other needs. It is also very often in your own interest to keep the policy for your former spouse separate from the ones for your current (or prospective) new spouse. You don’t want others controlling the coverage, accessing cash, or receiving a benefit to which they are not entitled. (For related reading, see: Get Through Divorce With Your Finances Intact.)
It may seem like life insurance can further complicate an already complicated and emotional divorce settlement, but it’s a critical element for both spouses’ financial futures. Along with your divorce attorney, work with an independent life insurance specialist to help you make appropriate decisions and answer the many questions you may have along the way.
(For more from this author, see: How to Buy Life Insurance With an Alcohol History.)