Divorce and life insurance: How to make sure your family stays protected

According to Statistics Canada, the average length of a marriage in Canada that ends in divorce is 15 years, and the average age at divorce is about 46 years old. As individuals in this situation re-evaluate their lives and finances, they’ll need to think about many aspects of personal finance, including but not limited to:

• Assets like cash, property, vehicles and other belongings
• Upcoming payments, such as bills, debts, housing and education costs
• Financial instruments, such as bank accounts and investments
• Custody of children
• Custody of pets

These items tend to dominate divorce discussions. What’s often overlooked—despite being critical financial assets—are insurance policies, including life insurance.

Including life insurance in divorce discussions

When divorcing couples talk about dividing assets, life insurance may not be high on the list of priorities. But, depending on the specifics of the policy and whether or not children or joint dependents are involved, life insurance can offer significant benefits and financial protection, either through cash value or as a death benefit. As you navigate the many decisions you’ll need to make during the separation and divorce process, it’s important to maintain and perhaps update your life insurance policy. Remember why you got it in the first place—to protect your dependents from financial hardship, should something happen to you.

Follow these steps to help yourself assess your financial needs, update your insurance policies and plan for the future.

Step 1: Review your expenses and make a plan

The first step in assessing your financial situation is a thorough review of your obligations. This includes expenses such as mortgage payments, utility bills, child care, debt repayment, groceries and educational costs.

Make a thorough list of the family and personal expenses. This process will help you understand how your finances will change or have changed, what your financial picture will look like moving forward and how/when you’ll need to make adjustments. It’s also important to note the expenses that you’re depending on your former partner to cover, either fully or partially. (For a helpful list of household expenses, download the free MoneySense budget template.)

If you’re unsure of how to organize your finances, enlisting the expertise of a financial planner could help. They can take a holistic look at your financial situation and come up with a plan, including which expenses to prioritize.

Step 2: Review and update your life insurance and critical illness policies

Once you understand your current financial picture, you can review your insurance policies and make any necessary updates. This will help provide reassurance and stability. This step is where life insurance, estate planning and critical illness and disability insurance come into play.

When it comes to life insurance, specifically, reviewing and potentially updating policy and beneficiary information should be the first step post-divorce. Most people who are married name their spouse as their primary beneficiary. Whether or not the divorce is contentious, they will likely want to update this to a new beneficiary. However, depending on the divorce agreement, there may be circumstances where the former spouse remains a beneficiary, as a way to provide financial support on the expenses they agreed to contribute towards.

Canadians can also name their children or other dependents as the primary beneficiary or beneficiaries. If the beneficiary is a minor, you will need to appoint a trustee, who would manage the funds of the trust until the child is old enough to do so.

You might also need to make further adjustments to the policy. It’s helpful to consult the professionals who are supporting you through your divorce, whether that’s your licensed life insurance advisor, estate planning specialist, accountant or lawyer. Some things to consider include:

1. Who will pay for the policy going forward?

To ensure your family’s insurance coverage stays intact, set clear expectations on who will pay for the policy. It’s worth noting that the owner of the life insurance policy does not need to be the same individual as the payor.

2. Is your insurance coverage sufficient?

After reviewing your financial obligations and identifying expenses that your former spouse is covering (partially or completely), does your life insurance policy provide enough coverage for your family? You may need to discuss purchasing additional temporary coverage if your debt load has increased. This applies to your critical illness and disability insurance policies, as well.

3. Is there cash value in the policy?

Some permanent policies accumulate cash value over time. The owner of the life insurance policy may decide to leverage the policy’s cash value as a loan for emergency cash-flow purposes or to fund a planned expense. The caveat is that the death benefit of the policy is generally reduced by that policy loan until the money is paid back. Whole life insurance policies typically have consistent premiums and generally guaranteed cash value accumulation, while universal life insurance offers flexible premiums and death benefits but with fewer guarantees. Universal life policies allocate a portion of your premiums towards the life insurance itself, while the remainder is divided between savings and investment components, which must be regularly monitored to ensure they are performing. Depending on the policy and its duration, the cash value of a life insurance policy may need to be considered as an asset in the divorce agreement.

In addition, reviewing your policy is important to keep track of payment cycles or any other conditions that may prevent your policy from coming into effect when needed.

Step 3: Turn your focus to your future

Once you’ve sorted out your financial obligations and reviewed your insurance policies, it’s time to look forward. Here are a few steps that can help protect your future as well as the future of your beneficiaries in the case of a divorce:

• A policy that insures your ex-spouse can be kept in force voluntarily, or you can get new policies to help provide financial protection for your dependents. This is especially important if you’re counting on your ex-spouse’s support payments for living expenses.
• Recent divorcé(e)s may also want to consider disability and critical illness insurance. Life takes lots of unexpected turns, and these types of insurance can help ease your mind so you can focus on your family and/or recovery.
• If a court orders it or if it’s integrated into your divorce agreement, a policy can be required to remain in effect as part of a divorce settlement or as part of a spousal or child support agreement.
• A new policy may be issued to replace an existing policy because it better meets the needs of both parties.
• Secure your own separate life insurance policy to ensure your children or other dependents are financially protected, especially if your ex-spouse’s financial situation isn’t stable. Life insurance coverage generally lapses when payments are missed.

Don’t be afraid to ask for help

You don’t have to do all of this alone. If you need help to organize your finances, divide up assets (including intangible ones like a life insurance policy) or explore new options, don’t hesitate to consult a professional. They can provide guidance and ensure you have proper protection for your family.

More about family finances:

• Reducing risk in an RESP: How to invest as your kid approaches college or university
• The best credit cards for families
• Multigenerational Home Renovation Tax Credit: What is it and do you qualify?
• How retired parents can use the FHSA to help their adult children
• When does the role of power of attorney end—and estate trustee begin?

About Michael Aziz, CFA, CFP

Michael Aziz is the chief distribution officer at Foresters Financial Canada & Canada Protection Plan—providers of life and critical illness insurance solutions since 1874.

Linkedin Website