In the chaos of separation processes, couples can overlook their life insurance policy when dividing assets which is a huge mistake.
When all is well and good, newlyweds usually purchase life insurance policies to protect the spouse and children in case something terrible like an accident or a critical illness happens. Much as a divorce is painful and stressful, it can become a reality. In the chaos of separation processes, couples can overlook their life insurance policy when dividing assets.
This is undoubtedly a mistake as insurance is crucial in divorce settlements. There are multiple facets of life insurance policies you have to consider during a separation or divorce. In this article, we will collate the most valuable information to make sure your life insurance coverage is as good as new.
Types of Life Insurance in Canada
As commonly known, some of the policies that you can have at present in Canada are:
- Term Life Insurance
- Group Life Insurance
- Whole Life Insurance
- Universal Life Insurance
We would not go into much detail about each kind as our previous articles have meticulously discussed all of them.
It is, however, essential to note that the type of insurance you are being covered with can significantly impact the way you handle life insurance during divorce or separation processes.
Important considerations in divorce settlements
Even when all assets are split evenly between the two spouses, this does not apply to life insurance coverage in Canada. If children are involved in the process, the court would also order one partner to pay for alimony.
Some of the most vital aspects that both parties should consider are outlined below.
If you currently have a life insurance policy with your ex as the beneficiary, you might want to consider changing that. You would want a close family member or children to receive the money rather than your former spouse.
Nevertheless, suppose they are taking care of the kids, or you are co-parenting. In that case, your spouse should still be the beneficiary so that they won’t be too overwhelmed with all the financial responsibilities. They would be one paying for your children’s post-secondary education and future expenses were you to pass away.
Of course, if you still want to proceed with the beneficiary removal and change to another person, your insurance provider will hand out the necessary forms for you to fill in.
Spousal and/or child support
Things can get even more complicated if you rely on your spouse for support. Should they unfortunately die or their support payments end, you might not be able to continue with your current lifestyle and handle most of your expenses.
In this case, you need to ensure that the separation agreements stipulate that your former partner must have sufficient insurance coverage to take care of long-term spousal support or alimony. More importantly, it would also help if you were named the direct irrevocable beneficiary to prevent any future complications.
Existing life insurance policy
Take an inventory of your existing life insurance policy, if any. This would decide if the coverage is adequate to handle divorce obligations, such as spousal and/or child support. Life insurance is among the existing assets and liabilities shared between the two spouses.
How the policy is handled depends on the type of coverage you two have. Take a whole life insurance policy as an example. You and your spouse can either cash it out to settle divorce obligations or keep the policy.
If there is an existing policy before the divorce, you will have to maintain coverage post-divorce. You should also name your children as the beneficiaries to take care of their future financial needs if you do not have any financial obligation to your ex.
This will help prepare for the unthinkable such as you suffering from a fatal accident or severe critical illness. However, if your children are too young, seek legal advice from lawyers to set up a trust and name a reliable guardian the beneficiary. As a result, all legal complications can be avoided should you pass away, and your children will always be protected financially until the age of majority.
New life insurance coverage
If the supporting spouse is not covered by insurance at the time of the divorce, they might be required to purchase one to cover divorce obligations.
On the other hand, if you are the one without insurance, you should consider getting a policy as soon as possible, especially if you have people depending on you financially and you still have a family to look after alone.
Potential problems with Life Insurance
If your spouse is the life insurance policyholder, they can either change the beneficiary or have their policy lapsed. The insurance company might not inform you as they have no legal obligation to do so for the beneficiary.
To prevent this from happening, use a third-party authorization to ensure you are always notified of any major changes. Besides, without the third party’s consent, your spouse cannot change anything in the insurance policy.
Both your and your ex’s financial situation could change, such as you are earning more than them, or they suddenly lose their job. This means that the divorce obligations must be renegotiated, along with the insurance policy.
These can change over time, so if the amount of alimony is $100,000 and your ex-partner already paid half, then a life insurance policy worth $100,000 would not be applicable.
Under this circumstance, you can cash out and pay the rest of the child support. Alternatively, you can add another beneficiary to get the other part of the insurance benefit.
The bottom line
It is out of the question that divorce and separation are difficult for all parties involved. However, you should never forget to deal with your life insurance policy to ensure both your and your children’s comfortable lives. If you need further advice on the different types of policy, contact us via Best Insurance Online, and Insurance Direct Canada to find the best insurance quotes available on the Canadian market.
Frequently Asked Questions
Besides Life Insurance, which we have discussed in detail in the article, you might have to deal with your existing health insurance, car insurance, and home insurance, if any. Bear in mind that all policies must be registered under your name with accurate ownership or lease details.
– Health insurance
If you were previously covered by your spouse’s insurance policy, you might have to purchase your own medical/ dental insurance coverage. You can either buy personal policies or get covered by your company’s health insurance.
Other than that, it is crucial to check whose insurance policy will cover your child(ren)’s medical and dental needs.
– Auto insurance
If there are multiple changes regarding the person who drives the car, the mileage you drive, the driving frequency, and where you live, you may need to inform your insurance provider as soon as possible since this can change your premiums.
– Home insurance
If you move to a new place, make sure the insurer is informed about the occupants when you buy rental or home insurance.
Should you depend on your ex’s support payments, make sure that you can still financially manage when they die and potentially stop the payments. On the other hand, if you are supporting them, then you might still be obliged to them even after their passing.
All in all, our advice is to always name your partner as beneficiary to cover spousal and child support. Beneficiary designations can also be arranged simultaneously as the separation agreement. And to confirm that it is being taken care of properly, consider independent legal consultation.
Whoever is making the support payments will have to pay their own bills as well. Hence, it is recommended that both parties purchase additional disability or critical illness insurance coverage if you are too sick to remain employed.
Either of these two policies can also pay for your future babysitters if you are a stay-at-home parent but cannot take care of your kids anymore because of accidents or ailments.
If you were covered by your former partner’s policy or in tandem with your employment plan, reconsider your insurance needs. Usually, your current life insurance coverage can handle most of your medical bills. But if it is not enough for you, you can get a personal health insurance plan separate from your governmental one. All of these policies combined will keep your bills and expenses covered.
Insurance refund cheques are only related to health insurance. Oftentimes, the insurance company will send the cheques to the insured’s bank account directly, no matter which spouse pays the health expenses. Only some providers agree to send to the non-insured party.
In this situation, there will be two cases: non-acrimonious and acrimonious. In the former case, both spouses will have a joint bank account where the insurance refund cheques are deposited to pay for the children’s medical bills.
In the second case, however, separation agreements can compel the insured party to provide the cheques to the non-insured that pays for the expenses during a certain period. Additionally, the insurance company will also issue statements verifying the cheque amounts.