How does Life insurance work in case of divorce?

Divorces are an unfortunate reality for several families today. In a mutual divorce, the husband and wife agree on terms that are acceptable to both of them for the financial aspects of their separation. The involved parties control the details and the mode of settlement. Any asset and amount of money can be included in a divorce settlement. The couple only needs to reaffirm the terms of their divorce in court. The question to ponder over here is the following- how does divorce actually affect impact assets, especially life insurance policies?

What do you do with your life insurance policy after a divorce? 

Any life change, like a wedding, the birth of a child, or even divorce, impacts your life insurance policies. It naturally shapes your direction in terms of either expanding your coverage, including or excluding members or even taking other essential steps per requirements. You must already know what is life insurance; you should now understand the steps to be taken in the context of a divorce. 

Here’s what you should do in case of a divorce- 

Update Beneficiaries

The goal of life insurance is to provide financial security for your family in the event that you are taken from them by fate. It is especially devastating if you are the family’s sole or primary breadwinner. Most people name their spouses as beneficiaries so that the family can live comfortably. However, what if you have a divorce?

Many life insurance policies are adaptable, allowing the nominee or beneficiary to be changed. You can update the name in the records by contacting the insurance company office or your insurance advisor. This process can be made easier in case you have an EIA.

EIA stands for e-Insurance Account or ‘Electronic Insurance Account,’ and it stores policyholders’ insurance policy documents in an electronic format. This e-Insurance Account gives you online access to your insurance portfolio. It is something that you should go for if you have not already. 

Benefits of an EIA:

  1. a) No physical policy documents 
  2. b) Manage all of your life insurance policies in one place
  3. c) Update contact information in all of your policies at once 
  4. d) Opening an EIA is free

The Insurance Regulatory and Development Authority (IRDA) has authorized the following four entities to act as “Insurance Repositories” for opening the EIA:

  1. NSDL Database Management Limited (NSDL)
  2. Central Insurance Repository Limited (CIRL)
  3. Karvy Insurance Repository Limited
  4. CAMS Repository Services Limited

What Should You Do About Joint Life insurance?

Married couples frequently purchase joint life insurance policies. These policies pay out once upon the death of the first spouse and again upon the death of the second. For married couples, a joint life insurance policy is usually more affordable. In most cases, joint life insurance cannot be divided. However, the following are some exceptions:

  1. a) If the policy includes an investment component, you can surrender the policy and receive the fund value. This can be divided between spouses in accordance with the divorce agreement.
  2. b) Any spouse can allocate the policy to another. However, both partners must agree to this arrangement, and the spouse deciding to take over must be capable of paying the future premiums. As a result, the policy premiums and rewards will only belong to the assignee.
  3. c) In the case of a pure-term plan, merely cancelling the policy is an alternative if neither spouse wants the other to receive the sum assured in case of their demise within the policy period. 

How Should Child Insurance Plans Be Handled?

This is best addressed through discussions and delegating rights toward either spouse. The assignment can be determined by the primary custodian of the child or plainly on the ability to pay premiums.

In both cases, the child is the beneficiary of the policy and its proceeds. In the policy, one of the parental figures must continue as a primary caretaker until the child reaches the age of maturity. 

Plans for Health and Other Insurance

For family mediclaim policies, the spouse who pays the premium can keep the same. However, if you have kids, you must decide on the ownership and premium payments to keep the insurance plan going with its benefits intact. The partner left without insurance should opt for a new life insurance policy after that. 

To Conclude 

Divorce is a hard choice to make in life, but once made, the emotional aspects of the divorce should not be allowed to cloud financial decisions. First, the husband and wife must list their assets and savings, including retirement plans, a house, a car, and life insurance. Then, they can seek the advice of a financial planner to help them distribute their assets. When relationships transform, insurance and investment decisions need to be tweaked accordingly. Patience is always the key to ensuring a better future for both parties.