Life Insurance & Divorce

Written by owen e. richason iv
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Life Insurance & Divorce
(life savings image by Pix by Marti from Fotolia.com)

Divorce actions between married couples carry a significant restructuring of financial instruments, assets, joint and individual debts, and everything held in common or accumulated during the course of the marriage.

If a life insurance policy is present, it too, must be included in the final divorce settlement to be properly adjudicated through the court for legal and tax implications.

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Proper Assignment

Life insurance policies are by nature complex. They derive a payout based on income, term of payment and contract specifications in relation to circumstances (such as death or partial or total disability). If a spouse enters the marriage with a life insurance policy (usually attached to an employment health insurance plan), the policy may be awarded to the same party as being established prior to entering the marriage. However, a general practice of the courts is to divide assets equally (called equitable distribution), and most life insurance policies are acquired during the course of the marriage.

Term Versus Whole Life

Term life and whole life policies have different valuations and are generally treated differently by the courts at large. Some courts will treat whole life as having instant tangible value, because whole life policies have cash surrender values. Moreover, whole life policies are a sole contract for a term of many years, so courts will review the premium history. However, term life policies do not have the same immediate cash value, but may have value if sold to a third party (such as a hedge fund).

Valuation

The value of the policy will have to be determined before the finalisation of the divorce settlement. Depending on the type of life insurance policy and what premiums have been paid, along with its present value, the court will divide the asset between the divorcing spouses unless a different agreement between the parties is reached prior to the settlement action. Whole and term life have intrinsically different valuations; therefore, many factors are used to determine the dividable value of a policy, if any.

Minor Children

Minor children are common in divorce lawsuits. Many children are deemed beneficiaries but cannot take advantage of the proceeds until they reach the age of majority. In other words, though a child may be named as the sole beneficiary to a life insurance policy, the court may still award the policy to be taken under the auspices of the custodial parent or guardian until the child reaches the age of 18 or 21.

Considerations

Couples who are divorcing may elect to roll the life insurance policy's cash value into a 1035 exchange, which is tax deferred and is an alternative to paying taxes after liquidating a policy.

A life insurance policy may have to be temporarily funded through the divorce process. As with any other joint or individual liability obligation, premiums must be paid to keep the policy current. Once the divorce settlement is reached, the party awarded the policy will likely receive the benefits, less the cash surrender value and any tax implications.

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