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Messy Divorces and Jointly Owned Insurance

Divorce today is just a way of life. Most people that haven't been through divorce personally, know someone well, that has been through it. Everybody knows that in spite of all the other things that need to be done, there is the matter of the division of assets that need to take place. This discussion will be about the assets known as life insurance.

This is going to be a brief discussion about the things that need to be discussed at divorce time, relative to the asset valuation of life insurance and who gets what. It's not that easy. There are many ways a family can structure life insurance ownership, payment, who is insured and when it pays.

In young families, it would not be uncommon to have a policy set up that pays $1 million on the first death of two parents and it is owned by the father. This would have been set up to provide liquidity for the surviving family members. You would think in the event of a split up this would be easy; if it was term insurance with no cash value you could separate it in to two $500,000 policies at current rates and if there is any cash value that it be divided and half put in to each policy. It's not that easy.

The insurance company is in the driver's seat on this one. There is more risk to the insurer if two policies are in force rather than one, even though the risk amount is the same. If the insurance company's allow the separation of policies and thus risk, they may ask for new medical evidence on each insured life or in fact may offer reduced coverage with no insurability requirements. They may want to current date the new policies for pricing purposes or may back date to original ages. As well, they may wipe out or substantially reduce any accumulated cash values. It is really something that you have to find out first what your existing contract allows, and then to contact the insurance company and clarify what there current practice is. You should never negotiate any kind of settlement like this with out first finding out what you can do. Get what your options are in writing.

Another complicated problem is with a "joint and last to die" policy is obtained. Usually done for estate planning purposes, this type of policy usually pays on the second death when two lives are insured. This is done to provide liquidity to an estate for final expenses for estate distribution, capital gains taxes, etc. This type of plan often involves policies that have substantial cash values as well, because policies are usually of a permanent nature for this type of coverage and usually involves older persons.

The two main issues arise here as well, 1) The cash value challenge and 2) the health situation of either of the insured.

The splitting of the face amount and cash values would be dealt with as indicated above. The discussion of the face value of a policy on a terminally ill person has been had in more than one forum. Believe it or not, it can actuarially be calculated. Evidently if there was a terminal illness involved or just failing health, it may be better for people to leave there insurances intact at the time of a divorce and have another agreement put in place to deal with the distribution of this particular asset.

Regardless of what is done, life insurance, critical illness etc is viewed as a family asset and must be divided. At least the value has to be divided. The way it is divided will depend on each family situation.

I just want to bring some possibilities to your thinking in order to make you aware, that with insurance matters, you don't often have the final say in what "can" be done. There are other factors involved, including health. Always make sure you seek the advice you need from someone who is qualified in the areas that you need help.

JK