Live Forever or Die Trying: Life Insurance After Divorce
In many divorces, the issue of life insurance can be overshadowed by more immediate concerns, such as the division of the marital estate, parenting time, spousal support (“maintenance”), or child support. However, the proper handling of life insurance policies can ensure predictability for both spouses and peace of mind that children will be raised in a financially stable environment until they become adults.
Types of Policies
Many types of life insurance policies, including whole life and universal policies, accumulate cash value over the life of the policy. Prior to payment of the death benefit, a portion of each premium payment becomes accessible to the policy owner as the cash value. In Colorado, an insurance policy with cash value that has built up during the marriage is considered an asset subject to equitable division. As a result, the policy can be allocated to either spouse or cashed out with the proceeds divided between the spouses. If liquidity is an issue, the cash value of life insurance can also often be accessed by taking a loan from the policy.
Term life insurance policies do not have cash value and are not considered marital property to be divided in a Colorado divorce. Generally, term life policies are allocated to the owner of the policy.
Life Insurance for Support Obligations
To ensure financial support of their family members as part of their divorce settlement, many spouses agree to maintain life insurance to secure maintenance or child support (“support obligations”). Under such a policy, the payor spouse is the insured and the spouse or children that receive the support are the beneficiaries. If your case is litigated, the court may order the payor spouse to maintain an existing life insurance policy or execute a new policy to secure his or her support obligations.
A settlement or court order that involves life insurance to secure support obligations should include language for the minimum duration and death benefit of the required policy. Additionally, it should include language that the policy owner cannot alter the beneficiary without the other spouse’s consent until the requisite duration is complete. Ideally, any agreement or court order will also require that the policy owner provide periodic proof that the life insurance remains in place and that the beneficiary designation is correct.
If an order to maintain life insurance is incorporated in your Decree of Dissolution of Marriage, by agreement or by Permanent Orders, the policy owner must not only maintain the court-ordered policy, but also refrain from changing the beneficiaries without prior court approval. Additionally, the policy owner must prevent the policy from falling into arrears or being cancelled for payment lapses. If either spouse fails to comply with the terms of maintaining a court-ordered life insurance policy, the other spouse can seek a court order to enforce compliance and sanctions.
Life insurance proceeds are only paid to the beneficiaries as recorded on the policy. Generally, the policy owner is the only person who can make changes to an insurance policy, including changing beneficiaries. In Colorado, while you can designate children as the beneficiaries of an insurance policy, minors under the age of 18 cannot receive life insurance benefits directly. In the event of your death, the money will be managed by either the insurance company or a court-ordered trustee until the children reach 18 years of age. To change the beneficiary of your policy, you need to contact your life insurance company and complete a Change of Beneficiary form.
In Colorado, a divorce revokes a beneficiary designation of the former spouse and the life insurance policy is treated as if the former spouse died before the spouse whose life was insured, however, this rule has several exceptions. Importantly, an insurance company is not liable if it makes a payment to a former spouse beneficiary before it has knowledge that the couple was divorced. See C.R.S. § 15-11-804. The best practice to avoid this scenario is to review your beneficiary designations every few years to stay current on all policies.