Life Insurance And Divorce In Texas
Wondering about Life Insurance and Divorce? Read on to find out why it’s important to address this issue in your divorce proceedings.
Most people end up assuming that a divorce decree takes care of everything related to finances and shared assets. However, that is far from the truth. Even after signing a divorce, there are several important steps that need to be addressed if one wants to complete the process entirely. Something that is often neglected in the process is life insurance and related issues. Sorting out life insurance often falls on the back burner when you have so many things to take care of.
It is essential to address the issue of life insurance as soon as possible, especially if you have children. Life insurance helps in protecting the financial interests of both the spouses and also any children/ dependents involved. In the following sections, we will explore some life insurance-related steps that need to be addressed when you apply for divorce in Texas. Without further ado, let’s dive in.
What happens to your life insurance in a divorce in Texas?
It is always a good idea to get a life insurance policy to protect the financial interests of your dependents. If something unforeseen were to happen, the proceeds from the life insurance policy would help in supporting your family and loved ones. Most people plan the life insurance to be 10 to 12 times their monthly expenditures.
If you have a life insurance policy at the time of divorce in Texas, it is important to address certain things related to it. Firstly, you need to check the beneficiary of the policy and also the policy payout. If the policy was bought years back, it’s possible that the policy amount is no longer sufficient as compared to your income and assets. In this case, you might have to contact the insurance money to check if they can tack some money on your current level. You can also buy a supplemental policy.
However, before doing any of these steps, it would be useful to consult an attorney. You need to ensure that you are in the clear to make any changes to your policy. In the process of divorce, there can be some temporary orders that can prevent you from changing your life insurance policy. In certain cases, you might also be required to purchase life insurance to plan for child support. Before we get to the steps of addressing the life insurance policy in a divorce, let us first take a look at the Texas Family Code.
In the Texas Family Code, Section 9.301 deals with the issue of the ex-spouse as a beneficiary of a life insurance policy after divorce. When a divorce decree is rendered after the insured person designates their ex-spouse as a life insurance beneficiary, it does not remain effective, except when –
- When the divorce decree designates the ex-spouse as the beneficiary.
- When one redesignates their ex-spouse after the decree has been rendered.
- When the ex-spouse has been named to receive the proceeds on behalf, or in trust for the dependents and children.
Steps Involved in Addressing Life Insurance After Divorce
1. Redesignate the beneficiaries
The primary purpose of your life insurance policy is to provide protection to your dependents and family members from financial ruin in case of your sudden death. Majority of the people add their spouse as their primary beneficiary in life insurance policies. Making your spouse the primary beneficiary helps in ensuring that your family is able to –
- afford rent or mortgage
- put food on the table,
- raise children (if applicable)
If you are providing the majority of the household income, having a life insurance policy is a necessary safeguard.
Now when it comes to life insurance and divorce, that is a whole new ballgame. If you are filing for divorce, it is highly likely that you don’t want a former spouse to gain the benefits of the life insurance policy. If the divorce does not involve any children, there are very few logical reasons to continue keeping your former spouse as the beneficiary of the policy.
Life insurance policies are usually revocable, which means that the insured person can change the beneficiary whenever they need to. However, with some life insurance policies, the beneficiaries might be irrevocable. This means that once the beneficiary has been designated, it would be difficult to change it. In either case, you can contact your agent to confirm if the policy is revocable or not. Thereafter, you can update your beneficiary in consultation with your lawyer.
2. Take the cash value into consideration
With some types of life insurance policies (universal life and whole life), the cash value is accumulated over time. When you pay the premium each month, a part of the money is added to a fund. This fund grows according to the interest rate, and its balance is known as the cash value of the policy. If you have an active life insurance policy, you can decide to forgo the death benefit of your life insurance, and opt for cash value instead. This procedure is called cashing out the life insurance policy.
It is important to note that the life insurance policy’s cash value is essentially part of your joint net worth. The most advisable course of action would be to include the life insurance policy in the financial assets that need to undergo division. This would mean that your ex-spouse would get half of the cash value derived from the insurance policy.
3. Alimony and Child Support Protection
If you get custody of children after divorce, it is important to protect child support or alimony. The child support obtained from the other parent (who does not have custody) will go into managing the expenses of raising the children. If a situation arises when the non-custodial parent is not around, the other parent could be left in a difficult situation. The best way to shield your children from such a situation would be by maintaining some life insurance policies. The benefit from the policy should be sufficient to replace alimony or child support until the child becomes an adult.
4. Getting life insurance as a single parent
When you turn into a single parent after divorce, it can be extremely challenging. You might find that you can not rely on your former spouse for financial support. In such a situation, when you are the sole caretaker of your children, it is necessary to put together a plan to protect their future. Since the children will be relying on you for full financial support, you need to ensure that they are adequately taken care of in case of your death. This means that you need to have a will in place that appoints someone as the guardian of your children.
It is also important to have a life insurance policy in place to protect your dependents. If the premiums are not too much, it is always good to choose a larger benefit amount. You can calculate the minimum amount by first calculating the number of years until your child turns 21 or 18. You can then multiply this number with your annual income to obtain the minimum benefit amount.
Issues in Life Insurance and Divorce
Let’s take a look at some common unforeseen problems related to life insurance and divorce –
Problem #1: How to leave insurance proceeds to minor children?
This problem raises the question of inheritance. We can assume that your sole heir is a minor child and that you have no Will. In case of your death, your minor child will inherit the proceeds of the life insurance policy, however, it is important to decide how the child can gain immediate access to money. In this case, you might want to appoint a guardian or create a trust for the children. If you decide to write a new Will after divorce, you can add a clause about the terms of the trust. It can also mention who will manage the child’s funds.
Problem #2: What if the life insurance proceeds get paid to a disregarded beneficiary incorrectly?
Problems can arise if you fail to update your beneficiary after the divorce. According to Section 9.301, Subsection (c), if the proceeds are incorrectly paid to the former spouse by the insurer, then they are not liable to pay the right beneficiary unless –
- The insurer gets a proper written notice before the proceeds are paid.
- The insurer has not asked the court to formally decide the winner of the proceeds.
It would be wrong to force a beneficiary to chase down any proceeds from the wrong beneficiary. They should not have to run after the life insurance company to collect the life insurance policy proceeds. Make sure that the beneficiary gets updated on your life insurance policy after divorce.
Problem #3: What can be the disputes about the owner of a life insurance policy after divorce?
There can be instances when a divorce decree contains only general language in the life insurance policy section. This increases the possibility of a dispute over the ownership of the life insurance policies.
To better understand this, we will take the help of an example. In a 2017 case in Dallas, a husband added his wife as the owner of a life insurance policy worth $300,000 a year before their divorce. Twenty years after that, the husband ended up dying and the wife was paying all the premiums until that time. After the death of the husband, his children asserted ownership of the proceeds of this policy based on section 9.301 of the Texas Family Code.
The court said that the life insurance policy was given to the wife in the form of the property before the divorce. It further stated that the Texas Family Code did not apply here as the divorce decree did not divest the wife of her own separate property. From this case, it is evident that it is very important to give special attention when adding information about life insurance policies in a divorce decree.
How is Life Insurance and Divorce addressed in Texas?
In a divorce decree in Texas, the courts will make sure that the estate is divided among the designated party in the right way. The Texas courts will take into account the rights of each beneficiary, including any children that are involved. During the divorce proceedings, the court will divide the rights of the former spouses, as it has been outlined in the life insurance policy. If you want to ensure that all the insurance policies have been accounted for, you should collect documentation of all the current insurance policies, assets, and liabilities. Having an inventory of all the current life insurance policies will help in smoother divorce proceedings.
Questions to ask your lawyer about handling Life Insurance
When you discuss your insurance policies with the attorney, it would be wise to keep in mind why you got a life insurance policy in the first place. The attorney will then help you determine how any existing and new life insurance policies will be affected by the divorce. Some important questions you can ask your lawyer are:
- What will happen to my life insurance policies after the divorce?
- What insurance obligations would I have to look into after my divorce?
- How can I verify if my ex-spouse has a life insurance policy?
- How can I calculate the appropriate amount of life insurance?
Why do you need a Divorce attorney for sorting out Life Insurance?
Life Insurance policy-related issues often go unnoticed in divorce proceedings. From the important points mentioned in the aforementioned section about unforeseen problems, it is clear how important it is to navigate this path carefully. If you or your spouse has a life insurance policy in your name with a significant sum, it would be useful to take the help of a knowledgeable Texas divorce attorney. Addressing the policy-related issues in the divorce proceedings will help in avoiding any litigation later. If you want to get expert help for life insurance and divorce, call the Vendt Law Firm, P.L.L.C. today!