What Happens to Insurance Plan Post-Divorce
Divorce proceedings between a couple are anxiety-ridden times for both parties. It can make even the most amicable divorces hotbeds of emotion. Both parties are retreating into their corners, fighting for their interests, trying to split a joint life into equitable assets.
Life insurance plans, such as Tata AIA Life Insurance or any other savings plan taken during their time together as a married couple, need to be part of the activity of dividing marital assets. It is easier to do so in good faith rather than have a marriage court judge adjudicate, leaving both parties dissatisfied.
This article looks at the status of the life insurance and divorce settlement. It will introduce you to various terms like the nominee, the Married Women’s Property Act (MWP), the beneficiary, and the assignee.
Listing Insurance Plans among Assets
Upon filing for divorce, the couple usually draws up a list of assets before deciding how these assets are to be divided. Any current life insurance plans must be part of this list. It is a good idea to hire a financial planner here to ensure that all assets are listed and up for discussion.
Status of Life Insurance Plans during Divorce
Nominee: The policy nominee is the person nominated by an insured to take care of the latter’s financial assets after their death. In a marriage, this is typically the spouse. During divorce proceedings, the insured must ensure to remove the soon-to-be-ex-spouse as the nominee. It can then be assigned to another person with an insurable interest, i.e., someone who suffers direct financial loss when the insured dies. This life insurance divorce decree has to be completed before divorce proceedings conclude.
Beneficiary: A beneficiary benefits financially from the insured’s life, like parents, a spouse, or children. Typically, either spouse lists the other as the beneficiary to their insurance plan. Upon settling assets during divorce proceedings, the insured must change the beneficiary to someone with an insurable interest. The insured must notify the insurer and change the beneficiary at the earliest.
Irrevocable Beneficiary: This type of beneficiary cannot be changed. It is an option set when the insurance policy is issued. If the spouse is an irrevocable beneficiary, the death benefit cannot be changed even post-divorce.
Cash Value of Insurance Policy
Moneyback and whole life policies have survival benefits along with death benefits, i.e., there is a cash value accrued in the course of the policy’s period. A portion of the life insurance premium paid goes into investments that yield returns. The policyholder is allowed to forego the death benefit and take the cash value of the policy.
In the case of divorce, it is better to cash out the policy and decide on distributing it between the spouses as part of the financial settlement.
Child Support and Alimony
In a divorce, the spouses could end up with joint custody, or either spouse could have sole custody. Whatever the case may be, the insurance policy can play an important role, especially if the non-custodial parent is the primary earner. Their life insurance cover will provide the custodial spouse and the children financial support in the event of the primary earner’s death.
If the custodial ex-spouse is the primary earner, it makes sense to continue with their life cover to ensure the family’s financial security, should they pass on. In some cases, the custodial ex-spouse might consider the non-custodial spouse untrustworthy or financially irresponsible – another reason to ensure that the life insurance policy remains with them and that they pay the premiums regularly to ensure their children’s security.
An assignee is a person assigned both the benefit and liability of the insured’s policy. Typically, a spouse sets their counterpart as the assignee to the policy. Post-divorce, the insured now needs the all-clear from the ex-spouse to make any changes regarding nomination or reassignment. Therefore, it is important that the spouse reassigns the policy to the other before the divorce is completed.
Married Women Property Act
Consider this scenario: A husband has a ₹ 1 crore term life policy, with his wife and children as beneficiaries. Subsequently, the couple divorces, but the husband retains the beneficiaries. The husband subsequently passes away, and it is found that he has significant debt that needs to be cleared. In such a scenario, creditors can reclaim their monies from the insurance payout, since by law, their claims supersede those of the beneficiaries.
Section 6 of the Married Women’s Property Act ensures that such a scenario is avoided. If the husband fills a simple Married Women’s Property (MWP) addendum when purchasing the life policy, the insurance payout is protected from debtors, i.e., it does not form a part of his estate.
The payout is completely the property of the wife/ex-wife and children, and debtors cannot make any demands of the surviving beneficiaries.
A life insurance policy is not a priority during a couple’s divorce proceedings. In a pressure situation like divorce, it can become invisible. But the consequences of not considering them can be costly to the ex-spouse and children or other beneficiaries. Therefore, to ensure the continuity of their financial health, one needs to resolve the matters related to life insurance assets during such proceedings. It is a tough call in such a fraught time, but both parties need to eliminate emotion from their interactions so that their financial futures can be secured.