What happens to a life insurance policy after a divorce?
According to the Office of National Statistics, 42% of marriages in England and Wales end in divorce. Meanwhile, 46.2% of the working public has a life insurance policy, with 40% of these joint policies. At the convergence of these two statistics is a thorny financial and legal matter: what you do with a life insurance policy after a divorce.
In This Guide:
- Life insurance and divorce
- Divorcing with individual life insurance policies
- Divorcing with a joint life insurance policy
- Divorcing with a mortgage life insurance policy
Life insurance and divorce
Divorce can be an emotional and financial minefield, as you and your former partner negotiate the division of assets, homes, and possessions, and the custody of children. And part of the process of untangling your lives will be managing and changing any existing life insurance policies you or your partner hold. Your shifting personal and financial circumstances may also mean you need to revise the level of cover you hold.
How complex this process will be will depend on the type of life insurance you hold; single or joint and whether they're linked to a mortgage on a co-owned property. Below we run down the steps of handling these various policies following a divorce and the complications that might arise.
Divorcing with individual life insurance policies
Managing life insurance after a divorce will be easiest if you and/or your partner hold separate life insurance policies. However, it's more likely than not that your former spouse was listed as the primary beneficiary of your single policy and you'll likely want to remove them, especially if you don't share children. To do this, contact your insurer to change the person named on the policy. This is generally accomplished with a change of beneficiary form. Most policies will allow you to change beneficiaries at any time for any reason. You'll generally also need change the terms of your will, or if your life insurance policy is part of a trust, the terms of a trust.
However, you might want to keep your partner as the beneficiary of any life insurance payment if they're the primary caregiver of shared minor children and rely on spousal or child maintenance payments from you. Alternatively, your ex-partner might want to take out a new policy on your life, to protect the income they receive from maintenance payments.
Divorcing with a joint life insurance policy
Married couples often obtian joint life insurance policies, a policy for both of them that pays out once, generally following the death of the first spouse. 40% of life insurance policies sold in the UK are joint policies shared between spouses or partners. A joint life insurance policy can be a more affordable way of obtaining life insurance for married couples but unfortunately they're inflexible when life circumstances change. A joint life insurance typically cannot be divided (although there are some exceptions (see below).
That leaves you with two options: either to cancel the policy or to have one partner take it over.
If you have a whole of life insurance policy, there will be typically a surrender value you can obtain when cancelling it. The amount you receive will be equivalent to the value of the fund you have amassed, but minus fees and penalties. You won't recoup all of the premiums you paid but you can claw back some money.
Alternatively, one partner might want to take over a joint policy. This might make financial sense if some years have elapsed since it was taken out and you'd face higher premiums now that you're at a more advanced age. But you have to be able to keep up with the payments yourself.
To transfer a joint policy to one partner, one partner will need to sign over the policy to the other. You do this with a legal document, signed by both partners, which needs to be filed with the insurance company.
Additionally, following a divorce you'll need to ensure the sum insured is now appropriate, given your changing life circumstances. If you're maintaining a house and parenting children on your own, you may need a new policy with a higher sum insured.
However, some policies will allow you to adjust an existing policy you take over on your own without further underwriting, do take this into account when you compare life insurance policies. For instance, a life change benefit can allow you to increase the sum assured, sometimes by as much as 100%. Some insurers also grant you a separation benefit, allowing you divide a joint policy, either linked to a mortgage or not, into two separate policies, if you apply within a certain time period after your separation (often 90 days). These benefits are typically only available to customers under a certain age, however. 55 is typically the cutoff.
Divorcing with a mortgage life insurance policy
Many couples have joint mortgage life insurance policies, which pays off the outstanding balance on the mortgage on the home they own together following the death of one of them. Many mortgage lenders will require you take out such a policy as a condition of the loan, to ensure they receive their money back.
Ultimately, how you manage a mortgage life insurance policy following a divorce will depend on how you deal with the property. If you decide to sell it as part of the division of assets, you'll obviously want to cancel any life insurance policy linked to the mortgage on it. If you one of takes over possession of the property, buying out the other and obtaining a new mortgage, you also won't need to keep the life insurance policy and can cancel it. However, sometimes couples maintain joint ownership of a property following a divorce, often so children can remain in the same home, and in that case you may want to keep the life insurance policy linked to it, if you're continuing to pay the mortgage together.