Your Guide to Insurance Needs Following a Divorce or Separation
Posted by LPL Risk Management on
Whether you are married or living with a partner, the process of ending a relationship can be extremely complicated. Many aspects of your life will be affected, including your insurance needs, according to the Insurance Information Institute (I.I.I.).
“When discussing the financial aspects of a divorce or a break-up, insurance considerations should be a key component in ongoing and final decisions,” said Jeanne M. Salvatore, senior vice president and consumer spokesperson for the I.I.I. “Dividing up property, changing homes, and altering life insurance policies must be discussed to make sure that both parties, as well as children or other dependents, are financially protected after the separation is completed.”
The I.I.I. suggests couples review the following coverages if they plan to separate or divorce:
Let your auto insurance company know if there is a change of ownership, or designated driver, for any cars you owned as couple. If you or your former spouse or partner moves to a new home, you should get a separate auto policy immediately. And if either of you needs to buy a new car, arrange for a new auto policy before the car is registered. Removing a former spouse or partner from the insurance policy also protects you from possible liability if he or she is involved in an accident and gets sued.
“If you are separated and your spouse or partner is paying the insurance bills, make sure to provide your contact information to the insurance company as well,” noted Salvatore. “This way you can be notified if your spouse is in arrears. You don’t want to find out after an accident that your coverage was cancelled for lack of payment.”
If you have joint custody of a teen driver, decide which cars or cars they will drive and have them listed on the correct auto insurance policy.
Divorce and separation will generally result in a change of residence as well in moving personal items from one location to another. You will need to determine if one party will be staying in the current home or if both parties are moving into new residences. Regardless of where you will be living after the separation, make sure to get the proper type and amount of homeowners or renters insurance for your new house or apartment.
Personal possessions are also going to be divided between the parties. It is important that each person let their insurance company know the value of their possessions in their new home. If one party retains valuable jewelry, art or other luxury items in the settlement, they should inform the insurer whether to cancel or add any special floaters or endorsements to the policy for these items. Having an up-to-date home inventory, can help with this process; and each person should now take steps to create their own inventory once the belongings have been divided. An inventory can help you purchase the correct amount of insurance and speed up the claims process when there is a loss.
Couples buy life insurance for a variety of reasons, including covering existing and anticipated debts and financial obligations as well as providing an income and/or inheritance for dependents in the event of the death of one or both of the spouses or partners. When a couple divorces or splits up, these obligations may still exist.
Married couples often list each other as the primary beneficiary on life insurance policies, and should think carefully before making any changes during a separation. There may be good reasons to keep life insurance coverage on a former spouse. If one party is providing alimony and child support to the other, this may mean a loss of income to the surviving party if he or she dies. Some divorced couples may also consider keeping (or purchasing) life insurance on the spouse who has the primary responsibility for raising the children. If he or she dies, costly childcare will need to be arranged and financed. In such cases, the divorce decree should include the funds to pay the premiums on this life insurance policy.
If a divorced couple is purchasing life insurance solely to provide financial protection for their children, they may want to consider purchasing term coverage rather than whole life. Term is generally cheaper and it is designed to provide protection for a specific period of time—for example, until the children reach the age of 21. If there are no children involved, then changing the beneficiary on an existing life insurance policy may make sense. Beneficiary designations should also be reviewed on all retirement accounts, bank accounts, investment accounts and other assets, as well as on any group insurance through an employer.
Many people underestimate the risk of disability. Yet, between the ages of 25 and 55, a person is more than twice as likely to become disabled through an accident or disease, as they are to die. If a former spouse becomes disabled and cannot work, it could threaten alimony and child support payments, so it is important to safeguard against this possibility by specifying that his or her income be covered by a private disability insurance plan.