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Life insurance can be one of the most valuable assets in divorce. EP Wealth advisor Kathy Costas explains the pros and cons of cashing out a policy when dividing assets. Find a divorce financial planner near you.
What Is the Value of a Life Insurance Policy in a Divorce?
Deciding what to do with a life insurance policy is a crucial part of the divorce process. For many couples, life insurance can be a very valuable asset, particularly if we’re referring to a whole or permanent life insurance policy that has a cash value.
Your initial impulse may be to cancel the policy, cash it out, and divide that cash. However, I encourage clients to step back and carefully consider the implications of that course of action. Holding on to a life insurance policy may potentially protect the financial interests of both spouses and any dependent children they have.
Protecting Child Support With Life Insurance
It can be beneficial for clients to consult a divorce financial planning advisor to review their life insurance policy, especially when children are involved. As I often say, your spouse may not always remain your spouse, but your children are always your children.
If a spouse paying child support passes away, their ex and their children lose that income stream, while the expenses continue for those kids. A life insurance with a benefit high enough to cover child support payments will help provide for the children until they are grown.
In fact, in some cases, the courts will order you to obtain life insurance to provide child support.
Life Insurance to Protect Alimony
Life insurance can also be used to cover spousal support. When an individual paying alimony or spousal support dies, their payments stop. This can leave an ex-spouse struggling financially. Life insurance can assist with expenses for an ex and the children in the event of the payer’s death.
Some clients are not concerned with paying alimony after their passing. But for others, they want to assist the ex in providing for the children, aside from child support. If that’s important to you, make sure your ex is the beneficiary of your policy.
This is a personal decision that often depends on many variables, including:
- How old the children are
- How long the supporting spouse is required to pay alimony
- When the policy will be terminated
I discuss these details with my clients and their attorneys to help them make informed choices about their financial futures.
Planning for Long-Term Care With Life Insurance
When clients have life insurance, we will also discuss the need for long-term care in the future. We’re seeing more gray and silver divorces among older couples, and it’s important to plan financially for their care in the years ahead.
Some life insurance policies can be converted into funds to be used for in-home care, assisted living, and even home modifications allowing them to live in place. Some policies require a long-term care rider to convert them if needed.
We review each policy on a case-by-case basis and provide insight on how to proceed.
The Risks of Cashing Out Life Insurance During Divorce
There are risks to canceling life insurance to cash out and divide the proceeds. That cash amount may be significantly less than the value of the available coverage.
For example, I am currently working with a 66-year-old man who pays $500 a year for a policy that’s worth half a million dollars - but the cash value is around $30,000.
As I explained to him, he is unlikely to ever get that category of coverage again. Even if he is relatively healthy, age is still a key factor that insurance companies consider when approving new policies.
While some divorce attorneys may initially advise their clients to cash out life insurance, I am there to say: Hold on, let’s look more closely at this valuable piece of a couple’s overall settlement before we make a decision.
It’s about looking at the couple’s larger financial picture and providing the guidance and support to help them navigate their divorce settlement as productively as possible.
Call or connect online to learn more about financial planning during a divorce or locate an EP Wealth advisor near you.
DISCLOSURES
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. Content does not involve the rendering of personalized investment advice, nor is it intended to supplement professional individualized advice.
- As the author of this piece, EP Wealth Advisors, LLC (“EPWA”) has tailored the messaging of this article to align with the categories, services, qualifications, capabilities and services that it offers and can service. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professionals. EPWA makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of opinion by the author are subject to change without notice.
- EPWA is not in the business of providing legal services or advice. Always consult your tax advisor and/or attorney regarding your specific situation.
- The Certified Divorce Financial Analyst® (“CDFA®”) that are employed by EP Wealth Advisors, LLC are not practicing attorney, accountant, tax professional, or legal expert. All assessments and subsequent recommendations limited and are performed exclusively under the guise of financial planning. An attorney must be retained in order to professional and accurately assess legal options and/or to provide counsel. We also recommend consulting a CPA, accountant, or tax professional.
- Hiring or working with a CDFA® does not guarantee or ensure that a client or prospective client will experience encouraging or favorable results.
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment, tax, or legal advice nor is it intended to supplement professional individualized advice by the appropriate professional(s).
- The decision to work with a CDFA® professional will differ amongst clients and depend on individual circumstances of each respective client. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC and/or a CDFA® will satisfy your divorce service needs. Services offered by other professionals may align more to your specific needs.
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability. Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professionals. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. Please consult a professional Financial Advisor before applying any of the approaches or strategies made referenced directly or indirectly in this publication.
- The information presented here is not intended to be regarded as a complete list of things to consider, including but not limited to, categories, services, or qualifications that a client or prospective client should contemplate when assessing or comparing Financial Advisors and/or Firms. As the author of this piece, EP Wealth Advisors, LLC (“EPWA”) has tailored the messaging of this article to align with the categories, services, qualifications, and capabilities that it offers. There is no guarantee or warrantee that the services offered by EPWA will satisfy your financial services requirements. Services offered by other advisors may be more suitable to your specific needs.
- There is no guarantee nor is the intention of this article to establish any sense of assurance, that, if followed, the strategies referenced here will produce a positive or desired outcome. In fact, there is no guarantee or warranty that any of the steps detailed will enable the ability to achieve appropriate, successful, profitable or desired results. The possibility of unfavorable and unsuccessful results is not lessened by the information and strategies made referenced here.
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