Life Insurance After a Divorce
Understand how divorce can impact life insurance choices and beneficiaries. Plus, how to calculate your insurance needs after a divorce...
People get divorced for all kinds of reasons. Sometimes, things go smoothly and both parties embark on new paths. Other times, things get a bit complicated. Either way, the one thing that all divorces have in common is that a married couple splits into two single people with their own needs. This requires a complete reset when it comes to financial planning.
Whether a divorce is contested or uncontested, a lawyer will likely help a couple divide their assets accordingly. Lawyers use generally accepted formulas to determine the value of assets, like real estate and other property (e.g., artwork and vehicles). They will also appraise financial assets, (e.g., investment accounts), and determine how tax liabilities might affect the settlement.
Life insurance is another thing lawyers and the courts need to consider when they are determining how to split joint assets when a couple divorces.
Below is a guide¹ to understanding how the value of your policy is assessed and allocated in a divorce.
Understanding life insurance in divorce settlements
There are two broad types of life insurance in Canada. The type of coverage you have, or don’t have, will affect how your assets get divided and how you protect yourself, and your children, once the divorce is final. Here’s how divorce affects individuals with permanent and term life insurance policies.
Permanent life insurance
This type of coverage never expires unless you stop making payments or decide to cancel it. It also allows the policy owner to accumulate savings in the policy’s cash value² portion. Because the cash portion has a dollar value and the potential to increase over time, it might not make sense to split it.
For example, if one partner in the marriage has a paid-up permanent life insurance policy and a 30-year investment horizon, it would be silly to cash it out now and lose the long-term, tax-free savings potential. Learn more about how permanent life insurance works as a tax-efficient savings tool.
Term life insurance
This type of coverage is typically purchased to replace income during a person’s working years. It can be sold in terms of 10, 20, or 30 years and can be renewed as needed at the end of each term. It’s unlikely that term life insurance will have a big impact on a divorce settlement because it has no cash value unless the policy owner dies during the term of coverage. However, a divorce lawyer may suggest or insist that a term life insurance policy is either purchased or kept up to date as part of the settlement.
What is court-ordered life insurance?
Whether a divorce is uncontested or contested, a divorce settlement could require that one or both partners purchase term life insurance for a minimum number of years to protect their children. And because minors cannot receive a death benefit until they reach legal age, it is typically the ex-spouse – a.k.a., the person who would be the solo caregiver if the insured were to die – that may be named the irrevocable beneficiary (i.e., a designated beneficiary who cannot be easily changed or removed without their consent).
So if a couple with young children were to divorce, the settlement could require that both parents have term life insurance policies, with each other typically named as irrevocable beneficiaries. Term life insurance can replace income that would be used to pay for important expenses in the event of the other’s death. Expenses could include:
- Alimony or other types of support
- Education savings
- Cost of living
- Legal costs
Depending on a couple’s financial situation, the age of their children, and other projected expenses, the settlement will specify how much life insurance each parent needs to secure as well as the length of the term.
Calculating your insurance needs after divorce
Just like calculating how much life insurance you need to replace your income, there is a rule of thumb you can use to estimate how much coverage you might need after a divorce.
To determine the minimum amount of life insurance you should purchase for yourself, multiply your annual, after-tax income by the number of years until your youngest child reaches the age of 18. This means that if your income is $50,000 and you have an eight-year-old child, you probably need $500,000 in coverage ($50,000 X 10 years). A 30-year-old single, non-smoking mother could achieve this by purchasing a 10-year term life insurance policy and expect to pay about $15 a month³.
Common challenges you may face
Divorce is hard enough without getting into the weeds of financial planning as a single person. Depending on the pace of your settlement, you may feel pressure to make long-term financial decisions when your mind is elsewhere. This is why you should enlist the help of experts who have helped people navigate this life change and know how to get you through the common challenges faced by couples going through a divorce.
| Challenge | Solution |
|---|---|
| Financial constraints | When life insurance is ordered by the court to protect your dependents after divorce, the payments should be factored into the settlement. When coverage is optional, an insurance advisor can help you choose the right type of coverage with payments you can afford. |
| Policy ownership and beneficiary issues | Before your divorce is final, examine any life insurance policies to determine whether there should be a change of ownership or changes to the beneficiaries (i.e., the persons you choose to receive your life insurance payment in the event of your death). |
| Negotiating insurance requirements in settlements | It’s common for a divorce settlement to include provisions that secure alimony or child support payments. The courts will use time-tested formulas to work out how much life insurance coverage you need. Need help with this? A Serenia Life advisor can help you meet your obligations in a way that’s best for you and your children, now and in the long run. |
| Policy affordability over time | Keeping up with life insurance payments after a divorce can become a challenge when you combine it with all of your other expenses. But keep in mind that one of the hallmarks of a family insurance plan is flexibility. If your financial situation changes, an advisor can recommend adjustments to your plan or help you find alternative ways to pay for coverage. |
| Emotional and psychological impact | The emotional toll of a divorce can be high, so it’s not an easy time to be making complex decisions about money. Serenia Life members receive support services from knowledgeable advisors who can tap a wide network of specialists to offer guidance. |
| Ensuring adequate coverage | Even if a court has ordered a minimum amount of coverage, it might not be enough to replace your income if you make a high salary or you have a lot of financial obligations. You might also need more coverage if your family’s going to face a large capital gains tax bill on the sale of the family cottage. An advisor can help you crunch the numbers so your dependents are properly protected. |
| Navigating estate planning considerations | In an estate plan, life insurance is typically used to replace income (term life insurance) or generate wealth (whole life insurance). After a divorce, complexities regarding inheritance, trusts, and guardianship arrangements will require you to rewrite or replace parts of your plan. To avoid losing momentum on long-term opportunities, work with a tax and estate planner in advance of finalizing your divorce negotiations. |
Carry on with confidence
Some people remarry and others carry on as a single person and solo parent. Regardless of your path, divorce will change how you plan for the future. The Serenia Life team can help you reset your goals, make adjustments based on your new reality, and build a future for yourself and your family in new ways.
If you’ve been told by the court that you need to obtain life insurance or you want a way to protect your income after divorce, talk to a Serenia Life advisor or get a quote online today.
Why choose Serenia Life for life insurance?
As a member-based organization that’s been around for nearly 100 years, we encourage kindness by sharing a portion of our profits through community outreach, fundraising, and unique member benefits that help Canadians support their family, their community, and the causes they care about. The more we grow, the more we can give.
We provide members with access to a growing collection of member benefits that make a positive impact on their lives and the lives of others, such as:
- $1,000 post-secondary scholarships
- $250 seed funding towards fundraising events
- Free digital wills (value: $189), or money towards drafting/updating a will through a lawyer
and much more
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Disclaimers
¹This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for legal advice. You should consult a lawyer if you have questions about divorce in general.
²Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued.
²Assumes a female, non-smoker, aged 30, purchasing a TERM 10 term life insurance policy with no additional features or riders. Rates will vary based on actual circumstances.
