Wondering how divorce will affect your life insurance policy? Here's what you need to know, from Honorée Corder, the author of "The Successful Single Mom" book series. Have questions? Ask in the comments.
Will you be protected in the event your ex-spouse dies and he (or she) is the major provider for you and the children? It’s often assumed that today’s circumstances will last forever, but the truth is, if you don’t think about the future today, you may end up with painful circumstances years down the road. Even as you go through the process of divorce, be sure to take into consideration what you and your children will need as time passes and circumstances change.
One of the more neglected areas of a divorce settlement is insurance, and that’s because insurance is an often misunderstood financial tool. Because it can be both a risk management tool and a wealth accumulation tool, it’s important to understand the role it plays prior to divorce so you can deal with it equitably after the fact.
As a risk management tool, there are two types of insurance that should be considered: life insurance and disability insurance. When there are any financial obligations between ex-spouses, (e.g. alimony, child support, mortgage payments) those obligations should be protected in the event of a premature death or disabling circumstance that would prevent the paying party from fulfilling their legal obligation.
Due to the importance of these tools to the recipient, the parent on the receiving end should be both owner and beneficiary of the policies and take responsibility for paying the premiums (which means you want to negotiate for those premium payments in the support settlement outlined in the decree). Don’t make the mistake of leaving the payments and beneficiary designation up to the “responsible party.” Sometimes the responsible party isn’t so responsible after all. All too often the receiving party ends up short changed –- and not always intentionally. It’s important to just eliminate the possibility of risk with risk management tools by being in control!
As a wealth accumulation tool, any cash value held inside a permanent life insurance policy and/or any value associated with a business buy/sell agreement that is funded with both life insurance and disability insurance should be considered “fair game” when the assets are being divvied up. Make sure you don’t overlook wealth that may be “hidden” inside an insurance policy and negotiate for either a “buy out” or revised coverage that puts you in control of both premium payments and the beneficiary designation.
Finally, if you find yourself in the new status of “single parent,” you may need to evaluate your own insurance coverage –- for both disability and death. Make sure your children don’t end up on the short end of the checkbook if something unexpected happens to you.
Your insurance needs can be analyzed by a professional. For your own peace of mind, be sure to select the right agent. Ask some of your trusted friends and advisors for recommendations. Interview several agents and select one who has (most of) the following qualities:
a. You can meet on a friendly basis and that feel he or she is competent. Remember that your agent will be working with your loved ones in the event something happens to you.
b. He or she has professional designations (CLU, ChFC, CFP, MBA, etc.,) and is a member of the Million Dollar Round Table (MDRT), thereby showing their experience and dedication to the insurance industry.
c. He or she has been in the business for more than five years. Many agents drop out of the business in their early years. You want someone with experience to serve you.
When you purchase insurance, you want to select a company that has:
a. Top ratings from the four different rating officials (A.M. Best, Standard and Poor’s, Moody’s and Fitch).
b. Been around for more than 50 years.
c. A mutual-fund company vs. a stock company.
Remember: “Cheap things are of no value, and valuable things are not cheap.” Insurance lasts a lifetime. You want a company to be there on the day you die to pay the claim.
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