When divorce actions are carried out between married couples, a significant restructuring of individual and joint debts, assets, financial instruments and everything accumulated during the marriage is required. If the couple has a life insurance policy, it must also be included in the divorce so that it can be properly divided through the court or tax and legal purposes.
Proper Assignment
Most life insurance policies are extremely complex. They determine payout based on the circumstances of death, partial or total disability, contract specifications, terms of payment and income. If one person enters the marriage with an existing life insurance policy, it will typically be awarded to the original party due to the policy being in effect before the marriage. Most life insurance policies that were acquired while the couple was married will be divide equally between both parties. This is known as equitable distribution.
Whole Versus Term
Whole life and term life insurance policies have varying values, with each being treated differently by the courts, according to Woman's Divorce.com. Because whole life insurance policies tend to have cash surrender value, the courts may elect to treat it with instant intangible value. Most whole life companies require a contract for terms spanning many years and courts will review the history of premiums. Term life policies work a little differently. Although they don't hold the same immediate tangible value, a policy can be treated as a hedge fund and sold to a third party.
Value
Your life insurance policy will have to be valued before the divorce settlement can be finalized. Depending on the present value of the policy, the amount of premiums that have been paid and what type of policy it is, it will be divided as an asset by the court among both parties unless an agreement was reached between the two parties beforehand. Term and whole life insurance policies have very different values so a variety of factors are used the figure out the amount of dividable value.
Children
It is extremely common for minor children to be involved in a divorce lawsuit. In life insurance policies, children are often named as the beneficiary but are not able to claim the proceeds until they have reached legal age. According to CompuQuotes, even though a minor child is named in a policy as the sole beneficiary, the courts may elect to to award the policy to the custodial parent or legal guardian until the minor reaches 18 or 21, depending on the state he resides.
Considerations
A divorcing couple may choose to place the cash value of their policy into a 1035 exchange. This is often used as an alternative because it is tax deferred. As with any type of individual of joint obligations, premiums must continued to be paid to keep the life insurance policy current. Once the divorce is completed, the spouse awarded the policy will be able to take advantage of the benefits after subtracting any tax implications and cash surrender fees.
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