There is so much to discuss about divorce and term life insurance! The 7 DEADLY SINS, “Wrath, greed, sloth, eny, pride, lust and gluttony” all come into play. Unfortunately, while going through my divorce I was so stressed out, I set up my life insurance policy and thought about the dos and don’ts afterward.
Hopefully, the questions and answers with Senior Managing Editor, Amy Danise of Insure.com will help you execute the right decisions from the start or aid you to correct mistakes you may have already made with your life insurance policy.
To understand the Q & A’s it’s best to summarize how term life insurance works. Basically, a policy owner is responsible for the premiums or payments. The insured person is the one whose life is insured. If this person dies while the policy is in place, a “death benefit” would be made to the named “beneficiary” on the policy.
Sin 1 Lust Question: Is it true an EX spouse could take me off as the “beneficiary” of his/her life insurance without me even knowing? The newest love interest could be on the policy.
Answer: True. It is very easy for an EX spouse to set up a life insurance policy and name you as the beneficiary initially, but unless he/she offers evidence each year – you’d have no way of knowing.
Sin 2 Pride Question: What if I ask for the current life insurance records and he says, “Trust me it’s there. I don’t want to give you a copy.” Is there anyway for me to search public records to make sure he’s not lying?
Answer: No. There are no public records. That’s why you are out of luck. There are thousands of life insurance companies so you wouldn’t even know where to begin calling to find out if matters were up to date. So your best bet is to speak with an attorney.
If your EX won’t provide a copy of the paperwork, at least get the life insurance company name so if something does happen you can call to make a claim. We get hundreds of emails from spouses, EX spouses who know there is a life insurance policy, but they don’t have any records of which insurance company holds the policy.
Sin 3 Sloth Question: Let’s say everything was in order. If my EX spouse died, isn’t the insurance company going to reach out and call me if I’m the named beneficiary on policy?
Answer: Very often the answer is “No” because they don’t know he/she died. If they knew he/she died, and your contact records were up to date as the listed beneficiary, they will often make a good faith effort to contact you as the beneficiary. But if you’ve moved and details were not kept current they aren’t going to find you.
More often, the situation for the insurance company is this: they don’t know the policyholder has died (i.e. Your EX). When the insurance company stops receiving payments, they’ll send notices “you’re over due.” If he/she doesn’t respond they still don’t know there’s a death. They made an effort to contact him/her. It would be cost prohibitive to send investigators to each house when a policyholder stops paying. A lot of people just stop or forget to make a life insurance payment and the policy lapses. It’s a very common occurrence; the insurance companies can’t track it all.
Sin 4 Envy Question: So knowing all this, what is the best way to structure a term life policy if you’re divorced and wanting to assure your children will be provided for in the case of either parent’s deaths?
Answer: There are a number of ways. Seems to me, one of the best ways to structure a policy in the case of a divorce is for each of you to own policies on each other. Place yourself as the POLICY OWNER, and the BENEFICIARY and make the EX spouse the INSURED PERSON. (If the INSURED DIES, i.e. your EX, then you as the beneficiary collect, so you can continue to support your children easily.) The EX spouse would do the same with his/her policy. So if either of you faces an unlikely death, the other EX receives the death benefit.
Sin 5 Wrath Question: If my EX has a history of violence or questionable behavior, isn’t there a risk – putting me on as the INSURED PERSON because he/she could just knock me off and collect on my life?
Answer: You obviously have to trust your EX spouse if you are going to set it up this way. You might see a lot of fraudulent life insurance cases in the movies and on TV, but it’s not common in real life. Whether it is murder or assisted suicide — if you have intentionally caused the death to your INSURED PERSON, the BENEFACTOR won’t get the money.
To summarize, by placing yourself as the POLICY OWNER, and the BENEFICIARY and making the EX spouse the INSURED PERSON, you are responsible for the premium payments and you’re in control of the beneficiary. This way your EX spouse can’t secretly take you off the life insurance policy.
Sin 6 Gluttony Question: Regarding beneficiaries – if I die, and I’ve listed my EX as the beneficiary how can I make sure he/she will use the money to support our kids?
Answer: You can’t. If he’s listed as beneficiary you are hopeful he/she would do the right thing, but he/she could take a huge European vacation with that money. If you listed your brother as the beneficiary, the same could happen.
Sin 7 Greed Question: So, I guess when it comes to money it’s important to think out all of the worse case scenarios?
Answer: Exactly. The way around it (to assure the children receive the money) is you set up a trust and the funds go into a trust. Another common mistake is designating the children as beneficiaries, because they can’t receive life insurance money until they’re 18.
Summary:
Question: After hearing all this, what if I want to switch things around on my life insurance policy. Say, I have my 4 and 6 year olds listed as the beneficiaries, what do I have to do to make changes?
Answer: If you own an existing policy it costs nothing to change your beneficiary and it can be changed at anytime.
To obtain or maintain the best life insurance policy it’s wise to approach with forward thinking. Consider what would give you the most control for your child’s situation should there be an untimely death.