How Do You Split Up Debt in a Divorce?
Dividing debt in a divorce can be complex. EP Wealth’s Linda Ginder, CFP®, EA, CDFA®, shares insights on handling mortgages, loans, and credit...
true Kathy Costas, CDFA®
Vice President
Westlake Village, California
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.
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.
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 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:
I discuss these details with my clients and their attorneys to help them make informed choices about their financial futures.
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.
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.
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