It’s an understatement to say that the circumstances of a family change when a divorce occurs. But, while lives may be separated going forward, a close connection between ex-spouses continues in regards to financial issues. A key area to address is how best to protect a family that is now split into two households and separate lives.
Insurance policies for married couples are typically looked at from a family perspective. It is common, for example, for a family’s health insurance to be provided through the health plan of one spouse’s employer. Meanwhile, life insurance and disability income coverage are usually structured based on the assumed expenses of a family that is living together under one roof.
The equation changes and becomes more complex when a divorce occurs. If you’re in the process of splitting from your spouse, it’s important to make sure that all parties affected remain adequately protected.
Life insurance solutions
As a couple works through the terms of a divorce settlement, the status of life insurance coverage should be a focal point of negotiation. This is particularly true in situations where there is a primary breadwinner in the home and he or she is carrying the most life insurance.
The value of having or continuing a life insurance policy in the case of divorce is simple--if the spouse providing alimony and child support should die, the surviving spouse will likely need the type of financial protection only life insurance can provide.
Existing life insurance policies may require some modification. The policy owner is responsible for payment of premiums, but a case can be made that the spouse who is the primary beneficiary of the policy should maintain ownership, so he or she can make payments to ensure the policy will not lapse. By taking responsibility for ownership of the policy, a financial strain may be created for the potential beneficiary, but the cost of the premiums can be included as part of an alimony agreement.
The non-custodial spouse should also approach this matter responsibly, assuring that proper policies are in place for the benefit of children and the spouse providing primary care for the children. Keep in mind that once an agreement regarding the named beneficiary is in place, and a court orders that the policy continue for the benefit of the ex-spouse and children, the insured cannot request a change of beneficiary. However, if there is no need to protect alimony or child support, there may be a preference to naming the children as beneficiaries of an existing life insurance policy.
Disability income insurance
Alimony and child support payments could also be put in jeopardy if the spouse providing financial support loses his or her ability to generate income. A disability policy is important for a married couple to help maintain financial stability in the event of an unexpected illness or injury.
If no protection is in place, financial support could be reduced if a disability prevents an individual from working. A key point of differentiation between a disability policy and a life insurance policy is that the owner of disability insurance must be the insured individual. Take steps to make certain in the divorce proceedings that a requirement is in place for the affected spouse to continue paying those premiums and to provide proof that the policy is kept current.
While existing life insurance and disability income policies can be maintained to support a spouse and children after divorce, the situation changes far more dramatically when it comes to health insurance. Most notably, once a divorce is finalized, a spouse covered under an ex-spouse’s workplace health care plan will need to find another option.
Children are not affected by the divorce as the spouse who carries coverage through work can continue to include his or her children on the policy (under the new health care reform law, until each child reaches age 26). But the divorced spouse will no longer qualify for coverage.
Options for the divorced spouse include:
• Obtaining coverage through an employer – If employed, one of the best options may be to utilize coverage from that workplace. In most cases, the cost is likely to be more reasonable and it provides a fair amount of stability in terms of the coverage provided.
• Staying on the other spouse’s health care plan – The COBRA provisions of the law that apply to employees who lose or leave their job also apply to spouses of employees who are divorced. If COBRA rules apply to the company of the working spouse, the other spouse has 60 days from the date the divorce is in effect to provide notice to the employer that continued coverage is desired. The downside to this approach is that coverage can only be maintained for 36 months, so a long-term replacement solution should be explored.
• Buying private coverage – Another option is for the spouse without health insurance after the divorce is to purchase an individual policy. This may be particularly beneficial to do as soon as possible, because coverage would be in place before any health issues arise that could make obtaining private coverage more difficult.
Any option selected will likely require out-of-pocket payments for the insurance coverage. This is another factor to be included in a financial settlement as the divorce is finalized.
Courtesy of Rich Van Loan, CRPC© is a Senior Financial Advisor and Chartered Retirement Planning CounselorSM with Ameriprise Financial Services, Inc. He can be reached at 617-337-3233 or via email at [email protected].