How Divorce Affects Life Insurance and Retirement

I sat down with life insurance beneficiary lawyer Chad G. Boonswang and talked about how divorce affects life insurance and retirement. They had the following professional insights, which I have compiled for you here:

Divorce and Life Insurance: Three Things You Need to Know

  1. Whole Life Policies are Marital Assets.

Whole life policies have present cash value and are considered marital assets, therefore, they must be divided as part of the divorce. Couples usually cash out a whole life policy and divides the proceeds in a way that is recorded in the divorce decree as part of the property settlement order or agreement.

  1. The Court Often Orders that Life Insurance Policies Be Maintained to Guarantee Support Payments.

It is common for the family law judge to order that a person paying alimony and/or child support to maintain life insurance and name the payees as beneficiaries.

  1. You Should Change Your Life Insurance Beneficiary after Divorce

While it is appropriate for the children of a divorced couple to be beneficiaries of their individual life insurance policies, no one wants their ex to get money when they die.

In some states, there is a statute providing for the removal of an ex-spouse as a beneficiary following a divorce, as a matter of law. Most do not. If you live in a state where there is no such statute, you should change your beneficiary to someone other than your ex unless there is a court order providing otherwise. This issue results in many beneficiary disputes. Changing your beneficiary ensures that your ex will not have a possible life insurance claim if you die.

Divorce and Retirement: Three Things You Need to Know

  1. In the Absence of a Prenuptial Agreement Stating Otherwise, Your Ex is Entitled to Part of Your Retirement Savings

Yes, that’s right – if you’ve saved for retirement through your employer-sponsored 401)k) or pension plan, those savings are a marital asset that will be divided. Your ex will probably get a Qualified Domestic Relations Order (QDRO) from the court directing your pension plan on how to pay your ex’s share.

QDROs apply to IRS tax-qualified pension plans covered by the Employee Retirement Income Security Act (ERISA). QDROs do not apply to military or government pensions, which are otherwise federally governed.

  1. Divorce Impacts Social Security.

The are many nuances to Social Security law, however, in general, someone can claim benefits based upon their ex’s work history if:

  • The couple was married at least 10 years;
  • The couple is divorced;
  • The ex is over age 62 and eligible for benefits;
  • The benefit based on the ex’s work history is greater than the benefit based on their own work history.

If these conditions are met, the applicant is entitled to 50% of the ex’s insurance amount at their full retirement age. Contrast this with the fact that a widow or widower who is full retirement age or older receives 100% of the deceased spouse’s Social Security benefit amount.

  1. Equity in the Marital Home Must be Divided.

Commonly a couple nearing or in retirement has a lot of equity in the marital home. When they divorce, that equity needs to be divided.

If one of them wishes to stay in the home, that spouse can buy the other out by taking out a mortgage singly, which results in a new or larger monthly mortgage payment obligation. That spouse might instead consider taking out a reverse mortgage in the amount required by the settlement agreement to buy the other out, as this eliminates the monthly mortgage payment obligation.

The spouse not wishing to remain in the marital home could also surrender their interest in it in exchange for the surrender of some other asset, such as a pension.

Another option for divorcing couples is to sell the marital home and split the proceeds. This means of course that both parties have to find and secure new housing that is acceptable, which may be difficult considering that their purchase power is greatly reduced by the divorce and division of property.

About the Author

Veronica Baxter is a legal assistant and blogger working in the greater Philadelphia metropolitan area.