When a divorce is close to becoming final, discussing life insurance with your Chicago divorce attorney becomes essential. After you have negotiated the terms of the spousal maintenance (formerly known as alimony), child support, and child-related expenses such as college costs or support for an adult child, you can discuss and negotiate life insurance. It is difficult to think about death, especially during sometimes tense divorce proceedings, but it is necessary to make provisions for the unexpected death or disability of the person that you are relying on for support.
Table of Contents
- Understanding Life Insurance in Divorce
- Difference Between Life Insurance and Disability Insurance
- Classifying Life Insurance as Property
- Updating Life Insurance Beneficiary Designations Post-Divorce
- Securing Spousal Maintenance With Life Insurance
- Securing Child Support Through Life Insurance
- Common Question: Can a court order life insurance to secure alimony or child support in Illinois?
- Other Insurance Policies to Consider
- Bringing It All Together: Managing Life Insurance in Divorce
Understanding Life Insurance in Divorce
When considering life insurance during divorce proceedings, it is crucial to understand its classification and how it is treated by the court.
As to any existing policy of life insurance insuring the life of either spouse, or any interest in such policy, that constitutes marital property, whether whole life, term life, group term life, universal life, or other form of life insurance policy, and whether or not the value is ascertainable, the court shall allocate ownership, death benefits or the right to assign death benefits, and the obligation for premium payments, if any, equitably between the parties at the time of the judgment for dissolution or declaration of invalidity of marriage.
750 ILCS 5/503 (b-5)(1)
Difference Between Life Insurance and Disability Insurance
First, let’s discuss the difference between Life Insurance and Disability Insurance as they relate to the provision in a divorce agreement. Life Insurance is a contract that will pay a sum certain out to the listed beneficiary upon the death of the insurance. Disability insurance is a contract that will pay out to the insured a monthly benefit to ensure that person maintained an income stream, even if they could not earn a paycheck. Depending on what you need to protect it is important to understand which of these types of insurance coverage is best for you
Classifying Life Insurance as Property
The final divorce decree should state what is happening to a life insurance policy, just like any other marital property.
A term life insurance policy pays a cash benefit to the designated beneficiary if the insured dies during the contracted time frame. Unlike permanent life insurance, term life policies do not build cash value and have no value beyond the death benefit.
A permanent life insurance policy provides life-long coverage. Most importantly, permanent life policies build cash value. When you pay a premium on a permanent life insurance policy, some of that money goes into an account which can grow, tax-deferred, and can be used while you are still alive. There are two different kinds of permanent life insurance policies, Whole Life and Universal Life. A Whole Life policy provides guaranteed cash value and a guaranteed interest rate. The benefit paid out at the insured’s death is also guaranteed. Here, the cash value growth isn’t taxed as income. Alternatively, the cash value of a Universal Life policy is dependent upon the current interest rates, and each Universal Life policy will see different growth patterns. The death benefit of a Universal Life policy can vary.
In a divorce proceeding, only permanent life insurance policies have value which can be considered “marital property.” An attorney can help you determine the cash value of your permanent life insurance policy and negotiate the portion you will keep in the divorce.
Updating Life Insurance Beneficiary Designations Post-Divorce
Judges have the power to determine the beneficiaries of an existing life insurance policies in the final divorce judgment.
(f) Maintenance Secured by Life Insurance:
When a court orders maintenance in a dissolution judgment, it may require life insurance to secure the award. The court can mandate that the payor’s life insurance, in whole or in part, be used to secure the maintenance obligation, based on terms agreed upon by the parties.
For existing life insurance policies, the court reviews evidence, stipulations, and other relevant data like death benefits and premiums. Based on these findings, the court can assign death benefits, the right to assign those benefits, or the responsibility for future premium payments in a way that is just and fair.
750 ILCS 5/504 (f)
Illinois is an automatic revocation state, which means that a life insurance policy must automatically remove the ex-spouse as a beneficiary after a divorce.
(2) If a judgment of dissolution of marriage is entered after an insured has designated the insured’s spouse as a beneficiary under a life insurance policy in force at the time of entry, the designation of the insured’s former spouse as beneficiary is not effective unless:
(A) the judgment designates the insured’s former
spouse as the beneficiary;
(B) the insured redesignates the former spouse as the
beneficiary after entry of the judgment; or
(C) the former spouse is designated to receive the
proceeds in trust for, on behalf of, or for the benefit of a child or a dependent of either former spouse.
750 ILCS 5/503 (b-5)(2)
After a divorce, the existing life insurance policy will automatically revoke your ex-spouse as the beneficiary and award the proceeds to the alternate beneficiary listed. If there is no alternative beneficiary listed, the proceeds will go to your estate. ILCS 5/503 (b-5)(3).
Securing Spousal Maintenance With Life Insurance
Unless both parties agree in writing, maintenance ends when the paying ex-spouse dies. This situation leaves the recipient vulnerable and without expected maintenance benefits.
When a court orders maintenance in a divorce, it does not require the paying party to buy a new life insurance policy. The court can only require a new policy in specific cases, and only if the recipient ex-spouse covers the premiums.
The court can generally only adjust terms for existing life insurance policies. However, both parties may agree to create a new policy to protect the recipient’s maintenance benefits.
The life insurance policy should cover the maintenance payments that the paying ex-spouse would have provided over their lifetime. The death benefit should not exceed this amount significantly. The court focuses on ensuring the recipient is protected in case of the payer’s premature death, not on enriching them.
Securing Child Support Through Life Insurance
Unlike maintenance, the court can order a life insurance policy to secure the benefits of child support.
(a-3) Life insurance to secure support. The court may require reasonably affordable life insurance to secure, in whole or in part, a child support obligation under this Section and Sections 510, 513, and 513.5 of this Act. This insurance can cover one or both parents, based on terms agreed upon by the parties or ordered by the court.The court may require such insurance remain in full force and effect until the termination of all obligations of support
750 ILCS 5/505 (a-3)
The court prioritizes protecting children and preventing them from becoming charges of the state. By ordering a life insurance policy, the court can secure support for the children if the paying parent dies early. When child support is secured, the paying parent often wants to name the minor children as beneficiaries instead of the other parent. This complicates matters, as it requires opening a court case to administer the funds. To avoid this, it’s better to name the other parent as the beneficiary “for the benefit of the minor children.”
Common Question: Can a court order life insurance to secure alimony or child support in Illinois?
Yes, in Illinois, courts can order life insurance to secure alimony or child support payments. The court may require one or both parents to maintain a life insurance policy to ensure financial support continues even after the death of the paying spouse. This is especially common when there are minor children involved or long-term spousal support obligations.
Other Insurance Policies to Consider
In addition to life insurance, there are different types of insurance policies to consider. It’s important to consult with a trusted insurance advisor to understand which options suit your needs. For example, a term life insurance policy provides coverage for a specific period at a fixed annual cost. This type of policy is often sufficient to protect your income stream in the event of death.
However, the risk of disability may be greater than the risk of death for the payor. If the payor becomes disabled and can no longer make maintenance payments, a life insurance policy won’t help. You would be at risk of losing those payments. A disability policy, on the other hand, would ensure that the payor continues to make maintenance payments even if they are unable to work. Carefully consider the coverage amount and terms to ensure you’re protected. It’s important to weigh disability insurance alongside life insurance when determining the best options for your specific situation.
Bringing It All Together: Managing Life Insurance in Divorce
Navigating the complexities of life insurance during divorce settlements is essential to ensure fair outcomes for all parties involved. Classifying life insurance as marital property, updating beneficiary designations, and securing support through life insurance policies are all critical steps. Each plays a vital role in protecting both your financial interests and those of your dependents.
If you’re going through a divorce and need help managing life insurance or other family law issues, the attorneys at Anderson Boback & Marshall are here to guide and support you. Contact us today to schedule a consultation and take the first step toward securing your financial future.
