Life insurance has as big a role, if not a bigger role, when there is a divorcing family with children. The key idea of life insurance is to protect the well-being of the children, replacing lost income from the main breadwinner. Ideally, this does not change in the face of divorce. The children still need to be protected.
Life insurance is not the first thing that people think of when negotiating a divorce, but it’s something they should keep in mind. Insurance News Net’s article “5 Ways Life Insurance Eases Post-Divorce Estate Planning” explains how life insurance continues to be a useful tool to serve the family, whatever its marital status.
Have money for divorce-related expenses. If the divorce is contested or includes child custody issues, the proceedings be quite long, maybe months or years. As a result, your attorney’s fees could be hefty. Those with an established permanent life insurance policy can take withdrawals or loans from the policy’s cash value to help pay expenses. If the policy is designed effectively, you won’t have to liquidate other assets or take money from your estate designated for beneficiaries.
Protect your income post-divorce. Your income can change significantly after a divorce, especially if one spouse was a stay-at-home parent. They may get alimony payments to help make up the difference, but if the payor unexpectedly dies, the lost income can create a lot of stress and financial hardship for those left behind. Permanent life insurance on the paying spouse can help provide coverage and replace income lost, if they pass away.
Preserve your estate post-divorce. Life insurance can also provide funds to pay off existing debt held by the deceased spouse. This also can eliminate the need to liquidate other assets from the estate that would have gone to the surviving spouse or other heirs. Take withdrawals or loans from the policy–tax-free, if the policy is set up correctly–and you can effectively plan your legacy, even if your ex-spouse hasn’t been financially responsible.
Ensure that children get a fair inheritance. If you have children from a previous marriage, it may make sense to provide for them through life insurance, rather than passing their assets to a new spouse first. In the alternative, you can provide for your new spouse through life insurance and leave the estate to the children outright or in a trust. With either option, dividing how you leave assets to biological children and a new spouse in a blended family, can eliminate stress and bad feelings, especially if the new spouse has children of their own.
Help fund college or other expenses for your child’s children. Protecting the lives of both parents with permanent life insurance allows you to make certain that the expenses for the children are addressed. Therefore, if the former spouse is responsible for paying medical expenses, college expenses, or other costs for the children, life insurance can provide needed funds, if that spouse passes. Permanent life insurance with cash value can also provide funds during the insured spouse’s lifetime (if cash isn’t readily available) to pay college tuition or help adult children repay student loan debt.
Consider permanent or whole life insurance, as well as term insurance. Yes, term insurance is less costly, but it will not accumulate any cash value. With permanent cash and a long-term care rider, the policy owner can accelerate the policy’s benefits to pay for long-term care. For divorced people who can only rely on themselves for care, if and when they can’t care for themselves, this can be invaluable.
Remember that life insurance is used to protect the policyowner, their income and their estate throughout life, regardless of marital status.
Reference: Insurance News Net (November 5, 2019) “5 Ways Life Insurance Eases Post-Divorce Estate Planning”