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
- 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. An award ordered by a court upon entry of a dissolution judgment or upon entry of an award of maintenance following a reservation of maintenance in a dissolution judgment may be reasonably secured, in whole or in part, by life insurance on the payor’s life on terms as to which the parties agree.
(1) With respect to existing life insurance, provided the court is apprised through evidence, stipulation, or otherwise as to level of death benefits, premium, and other relevant data and makes findings relative thereto, the court may allocate death benefits, the right to assign death benefits, or the obligation for future premium payments between the parties as it deems just.
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 the parties otherwise agree in writing, maintenance will terminate when the paying ex-spouse dies. This leaves the recipient ex-spouse vulnerable and without the maintenance benefits they were depending on.
When maintenance is ordered in a divorce, the court does not require that the paying party obtain a new life insurance policy to protect the maintenance benefits of the recipient party. The court can only order a new life insurance policy under very specific circumstances and only if the recipient ex-spouse pays the life insurance premiums.
Generally, the court can only order certain terms regarding a life insurance policy that already exists. However, the parties can agree to put in place a new life insurance policy to protect the benefits of the ex-spouse receiving maintenance.
The amount of the life insurance policy should be enough to cover the amount of maintenance that the paying ex-spouse would have paid throughout the rest of their life. However, the death benefit shouldn’t be much higher than that. The court emphasizes that the death benefit should be enough to protect the recipient in case of the payer’s premature death, not to enrich the recipient.
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. At the discretion of the court, a child support obligation pursuant to this Section and Sections 510, 513, and 513.5 of this Act may be secured, in whole or in part, by reasonably affordable life insurance on the life of one or both parents on such terms as the parties agree or as the court orders. 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.”
Other Insurance Policies to Consider
In addition to the consideration of life insurance and amount, there are different types of insurance policies that can be obtained and it is best to talk to a trusted insurance advisor about these types. For example, a term life insurance policy is a policy that is in effect for a specific term with the same yearly cost for the life of the term. This is often sufficient to cover your needs and make sure you are covered for the risk of loss to your stream of payments.
On the other hand, it could be said that the payor’s risk of becoming disabled is higher than that risk that the payor may die. If this is the case and the payor becomes disabled and unable to pay the maintenance and files to significantly reduce or terminate the payments, a life insurance policy does not help you and you are at risk that your stream of payments could end. A disability policy insuring the payor in the case he becomes disabled with a paycheck would allow him to maintain the maintenance payment and protect you. The amount and terms of the coverage have to be worked out to make sure you are protected but it is important to consider disability insurance along with life insurance when deciding which is best for your specific circumstances.
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. From classifying life insurance as marital property to updating beneficiary designations and securing support through life insurance policies, each step plays a vital role in protecting your financial interests and those of your dependents.
If you’re in a divorce process and need guidance on managing life insurance or other family law matters, the attorneys at Anderson Boback & Marshall can provide the guidance and support you need. Contact us today to schedule a consultation and take the first step toward securing your financial future.
