Divorce presents a number of critical financial and emotional issues. Among the more complicated financial issues are those relating to insurance. Health, car, homeowner, and property insurance are a few of the common types of insurance that can be viewed as assets in a marriage. Upon divorce, the responsibility and expense of maintaining appropriate policies through payment of premiums must be taken into account. Payment of premiums on such policies can be part of the divorce settlement. Following is a discussion of divorce and its effect on insurance policies.
After Divorce: Does Coverage Continue?
Federal laws regulating health and other types of federally regulated insurance may allow partners in a marriage to continue the policies after divorce. These regulations require that insurers continue coverage for up to 36 months before the insureds are required to apply for independent coverage. Beyond meeting the expense of premiums during this interim period, it may be necessary to assess whether or not a former spouse will be able to qualify for coverage at the end of the COBRA-mandated period.
Pre-existing health conditions or disabilities may make it impossible for a former spouse to obtain independent coverage, necessitating negotiation of adequate provisions to meet such expenses beyond a COBRA-mandated period. Conditional provisions, with accompanying insurance arrangements, may also be advised to protect against potential changes in health or disability conditions.
Often people may also carry long-term care policies or have insurance policies as part of their retirement portfolios. Accounting for such assets, equitably dividing such assets and providing for continuation of such coverage are increasingly important in divorce settlements. This is not only because younger people are beginning to anticipate and provide for such needs earlier in life. It also occurs because divorce affects couples of all ages and, not uncommonly, even marital unions of many decades’ duration.
Of special importance in divorce are issues relating to life and disability insurance. Because many life insurance policies may have accrued cash values, these values must be accounted for in the division of assets. However, obtaining such policies’ cash surrender values will usually result in termination of the coverage under the policy as written or, at the least, in loan charges and an obligation to pay back the cash amount or to reduce coverage under the policy. This may not be an acceptable result, especially where continued coverage is required, and other financial arrangements may be required to account for these assets.
Insurance and the Divorce Settlement
Typically, continuation of existing life insurance and disability policies requires consideration in a divorce settlement. The details surrounding the purposes for which such coverage was initially obtained may alter with divorce, which may affect the divorcing partner’s ability to keep the policies in force as initially written. Most importantly, divorce raises an issue whether one spouse maintains, after divorce, an insurable interest in the other spouse’s life or ability to continue earning an income at levels established or expected at the time of divorce. Earlier law disallowing such coverage on the basis that an insurable interest had ceased to exist has generally given way to recognition of the continuing financial obligations that spouses may have to each other and their offspring following a divorce.
Also typically, any accident or mortality that would affect the ability of a supporting spouse to meet support obligations or other financial obligations, such as child support, tuition and other foreseeable expenses associated with major life events, should be anticipated in advance and taken into account in divorce settlement negotiations. To the extent possible, it may be advisable to carry insurance adequate to meet the expenses of such obligations in the event one or both responsible spouses should pass away, particularly during a foreseeable period when such obligations may exist.
Designating and Determining Beneficiaries
Often, it will be advised that one or both spouses purchase additional coverage, take out additional policies, transfer ownership of such policies, or make certain that beneficiary designations are updated at the time of divorce. Coverage must be commensurate with established needs and expectations; excessive coverage may be disallowed or challenged by insurers. Failure to change a beneficiary designation can lead to serious consequences or court actions when the insured dies. Such lawsuits can include those initiated by insurance companies to resolve the thorny issue of to whom claims should be paid.
These lawsuits protect insurance companies from having to pay more than one claim on a policy and are called interpleader, a type of action brought by an interested third party, such as an insurance company. An interpleader action requires the court to determine who should receive the funds paid by the insurance company or party initiating the lawsuit to the court. While protecting insurance companies, an interpleader action may potentially delay payment of needed funds during critical periods of stress and trauma. In addition, such actions can result in significant court costs and attorneys’ fees.
Account for All Policies in the Divorce Decree
Including in the divorce decree distinct provisions concerning all insurance policies on an itemized basis, policy by policy, can minimize the confusion that may otherwise result once the divorce is final. This may also spare the parties later negotiations at times when it may be even more difficult (for practical as well as emotional reasons) to negotiate their differences. Such provisions in a divorce decree must clearly reflect the intent of the parties and must be easily understood by third parties.
An attorney should be consulted to make certain that all conditions are satisfied for making any changes in the insurance policies so that they conform to the final divorce decree. This will help to obviate confusion and added expense, particularly if the insured person should pass away during the period of the policy. It can also serve as a means of protecting beneficiaries against hostile actions seeking to deny them access to policy proceeds in instances where ownership interests should have been transferred or shared. However, some transfers of ownership may impact the ability to continue the policy on the terms on which it was originally written; the ability to understand the policy and to negotiate with the insurance company may prove important here as well.