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You are in the middle of a messy divorce and your ex-spouse won’t even return your calls, let alone keep you as the beneficiary of a life insurance policy. How can you make sure that your children are still protected by the family’s life cover in the event of a divorce?
Life insurance as part of a divorce settlement
If one spouse supported the other, and/or their children, financially before the divorce, any existing life insurance policy can be made a part of the divorce settlement to ensure that the spouse and/or children who were supported have financial security if the breadwinner passes. This is done by ceding the breadwinner’s life policy to the ex-spouse – essentially making them the owner of the policy. There should also be a stipulation that the breadwinner is responsible for paying the premiums. As the owner of the policy the ex-spouse will be copied in on any correspondence relating to the policy and if monthly premiums are not paid the breadwinner can be held in contempt of court.
Note that the life insurance policy number will be listed in the divorce order. A termination date should also be noted for example when the children turn 18 or 21.
Remember that if both partners made a financial contribution to the costs of child raising, the life insurance clause of the divorce order could work both ways. Both parties could be obligated to continue paying a share of the premiums because the cost of raising the children would be too high without both incomes.
Creating a trust to look after your children
If your life insurance policy does not form part of the divorce settlement but you would still like to keep it in place to benefit your children, you can set up a trust that comes into effect when you pass.
Creating a trust and naming your children as beneficiaries of the trust will ensure that your children, and only your children, benefit from the pay-out from a life insurance policy. You may want to do this if your children are minors and you don't know a suitable person to name as beneficiary. For example, you suspect any potential life insurance beneficiary will use some or all of the pay-out for themselves. Putting the proceeds of the payout into the trust ensures this cannot happen.
You will need to set up a trust, name trustees (the people who will administer the trust) and beneficiaries. You should then set up rules for the trustees to follow, and stipulate the life insurance proceeds from a valid claim be paid into the trust. The rules can allow for a monthly pay-out to cover your children’s expenses or for the money to be held in trust so your children’s guardian, usually an ex-spouse, can approach the trustees for any expenses that arise.
You can appoint a mixture of family members and professional third parties (such as your accountant or lawyer) to the board of trustees bearing in mind that professional trustees will draw a fee for their time and services. Your ex-spouse can also act as one of the trustees if you wish.
It’s worth noting that trusts are expensive to run because of the professional fees and annual financials and audits they attract. This could eat into the income and/or capital that could otherwise go towards your children’s upbringing. It also makes it difficult for your children’s guardian to access the funds that your children will need for general expenses, as each request will have to be put through the trust. At the same time, the board of trustees will make sure that your life-insurance pay-out is allocated according to your wishes and that your children are protected.
While you will have to decide what is best for your children, it is worth remembering that no matter how acrimonious your divorce, your ex-spouse probably still has your children’s best interests at heart, so consider carefully whether you want to severely limit their access to the funds.
You can learn more about setting up trusts in this blog.
Think of the future
Don’t let the upheaval of a divorce impact on your children’s future. When deciding on the best course of action to take with your life insurance policy consider their needs rather than whether or not your ex-spouse stands to benefit.
Published on: 29 October, 2014
Updated on: 15 November, 2023
