Divorce is one of life’s most stressful events. Taking care of the big things like divorce settlements, lawyers and children take up most of your time, and it’s easy to overlook the seemingly less important things like life insurance. Don’t neglect it – the protection offered by insurance can be very important in the years ahead, and your life insurance situation will be impacted by your divorce.
Life insurance isn’t an asset – it protects assetsOne of the reasons we forget about life insurance when we’re in the middle of a divorce is because divorce is about sharing assets, and life insurance isn’t an asset.
Unless you have a very old universal life policy that has an investment value, life insurance only pays out in the unfortunate event of the life assured’s passing and this remains the case whether you are married, divorced, in a life partnership or single.
Life insurance may not be an asset, but it does protect one of your biggest assets – your ability to provide financially for your family and dependants. So it is critical that you update your insurance policies to reflect your changed situation.
We’ve highlighted four things to check on your life insurance policy when you get divorced.
1. Insurance and your divorce settlementIf one spouse supported the other financially before the divorce, any existing life insurance policy should be made a part of the divorce settlement. This is done by ceding the breadwinner’s life policy to the ex-spouse – essentially making them the owner of the policy. If both partners made a financial contribution to the costs of raising children, both parties could be obligated to continue paying premiums because the cost of raising the children would be too high without either income.
2. Update your beneficiaries If you are married, chances are that your spouse is the beneficiary on your life insurance policy. You will want to review this when you get divorced. If you still support your ex-spouse, and your ex-spouse is caring for your children, you may want to leave your spouse as beneficiary to avoid setting up a trust. Otherwise, change the beneficiary.
3. Check that your sum assured meets your needsMoving from a double income to a single income can be scary. You may have shared the expenses of children, cared for an elderly parent or a young sibling while you were married, and now need to fund these yourself.
Whether you need more, less or a similar amount of insurance after divorce depends on your circumstances and how your divorce changes your financial obligations.
Consider the questions below to help you decide if your sum assured is adequate:
- Have you bought a house? If something were to happen to you would your insurance pay-out cover the bond?
- Do you have enough life insurance to protect your children and other dependants’ lifestyle, education and future?
Top tip: Also consider whether your disability cover is sufficient. If divorce means you become a single parent, you may need extra funds if you become ill or disabled as you will need to provide care for your children. Disability insurance and expense protector insurance can give financial protection in these times.
4. Protect child maintenanceOften, the parent who has custody of the children is reliant to some extent on an ex-spouse to pay maintenance.
Financial care for children in South Africa ends when a child reaches the majority age of 18 or becomes self-supporting (if the child is over 18, and at university, he may still be reliant on a parent or parents for financial support).
Child maintenance payments can be protected by taking out life insurance that insures the life of the maintenance payer and names the children as beneficiaries. This means that should the maintenance payer pass away, your children will be able to receive monies for their care.
The amount of cover should be the amount that would replace what you are expecting to receive in maintenance over the years, taking inflation into account.
If there is no insurance policy in place, or an insurance policy has lapsed, children have to claim for maintenance against the deceased parent’s estate. The estate can take a long time to resolve and pay-out. If the children are beneficiaries on an insurance policy, they will be paid quicker.
Two final pointsDon’t forget to update your will, and if you have group life cover with your employer, update those details and beneficiaries too.
The bottom lineLife insurance won’t be your top priority when you get divorced but take a few minutes to go through your policy and make sure it still meets your needs and will benefit those whom it is meant to protect.