You need to know
When a marriage ends, the financial ties don’t stop, particularly when children, shared debts, or spousal support are involved. In Canada, life insurance is often included in divorce negotiations, as it can provide for dependents and guarantee continuing support payments.
Why Life Insurance Is Important When You Get Divorced
In divorce, people usually think of property, savings, and retirement funds. But they forget about life insurance. This is a big mistake because life insurance is more than just something for when someone dies.
When you are dealing with a divorce, it protects the spouse and kids who need financial support. In Canada, the aim of family law is to make sure that kids and spouses who need financial assistance are protected after a split.
If one spouse has to pay child support or alimony, the other spouse might want to be sure that those payments will keep coming even if the paying spouse passes away. A good life insurance policy can supply that security.
Life Insurance and Divorce Settlement
Life insurance often comes up as part of the deal, usually when a judge or the divorce agreement says someone needs to keep a policy to protect others financially.
However, this happens when:
- Kids are involved
- One person relies on the other for money.
- Someone has to pay spousal support for a long time.
- One person earns more than the other.
Usually, the person paying child or spousal support has to keep a life insurance policy going. Their ex-spouse or the kids are named as the ones who get the money if they die, at least as long as the support payments are supposed to last.
For instance, if a dad has to pay child support for the next 12 years, a court may tell him to keep a life insurance policy that would cover those payments.
That way, if something happens to him, the insurance money can take the place of the support he was supposed to provide.
That’s why life insurance is often tied to divorce settlements here. It’s not about getting back at anyone; it’s about making sure everyone is protected and things are fair.
Divorce and Life Insurance: Don’t Make This Mistake
One thing a lot of people miss after a divorce is updating their life insurance beneficiary.
Some think their ex is automatically removed from their life insurance policy after the split. But that’s not always how it works in Canada.
In Ontario, a divorce may cancel an ex-spouse’s beneficiary status on certain policies. Howeve, if you don’t make the change yourself, your ex could still get the money if you die.
This can cause big legal problems and family fights.
Here’s why it matters:
- A man gets divorced and remarries.
- He forgets to change his life insurance beneficiary.
- Years pass, and he dies.
- His ex-wife might still get the money instead of his new wife or kids.
Updating your beneficiary should be a priority. If your divorce papers say you need to keep your ex-spouse or kids as beneficiaries, then you have to do that. But if not, update that policy to fit your current life.
Life Insurance and Divorce: What Becomes of Your Policy?
What happens to your life insurance if you get divorced? That depends on the policy you have.
There are primarily two types in Canada:
1. Term Life Insurance
This type of insurance insures you for a period of time, such as 10, 20, or 30 years. It has no cash value.
Generally that sort of thing isn’t split up in a divorce like term life insurance. because it’s not like a bank account.
But it is still important in a divorce, term life insurance, though maybe not split like the others.
A judge could order the continuation of one spouse’s term life insurance to ensure the support payments are covered.
2. Permanent Life Insurance
These include whole and universal life cover. These policies build up cash value.
This is where it becomes complicated.
In Canada, permanent life is considered joint property, as it is an asset with real cash value. The cash value accrued during your marriage can be divided, much like your savings or investments, if you also have a policy with cash value.
During a divorce, the cash value of the policy may be:
- Split between spouses
- Offset against other assets
- Transferred to one spouse
- Cashed out, in some cases
.
Divorce and Life Insurance Policies for Children
In many Canadian divorces, the parent who is paying child support is also required to hold life insurance for the children. This guarantees that their financial needs are met, even if that parent were to die before the completion of the support term.
For example:
- A mother has two children in her primary custody.
- The father pays child support monthly.
- The court requires the father to maintain a life insurance policy with the children named as beneficiaries.
- If he dies, the insurance proceeds take the place of lost child support.
Changing Life Insurance After Divorce
These are more steps to take after a divorce:
1. Check Your Life Insurance Coverage
You should ask yourself:
- Do I still need the same amount of coverage?
- Do I have to cover my ex-spouse?
- Do I have new financial responsibilities?
- Do I need more or less coverage now?
Some people need less coverage after a divorce because they no longer have a spouse to support. And some may need more if they are now the sole provider for kids.
2. Update Your Beneficiaries
Make sure your that policy reflects your legal requirements.
If your divorce settlement obliges you to keep your ex-spouse or children as beneficiaries, you must adhere to that. Otherwise, change your policy to reflect your current status.
3. Consider a New Policy
If the terms of your divorce decree entitle you to maintain your existing coverage to provide for child support but your current policy is insufficient, you may have to obtain a new one. People decide to take out a new policy for their own personal finances or estate planning after divorce.
FAQs
1. What generally happens to life insurance policies during a divorce?
Life insurance is reviewed, and the court or settlement may require one or both spouses to keep a policy to secure support payments.
2. Is life insurance considered a marital asset in a divorce settlement?
Yes, if it is a permanent policy with cash value (like whole life). Term life insurance is usually not a marital asset.
3. Can a divorce agreement legally require you to maintain life insurance for your ex-spouse or children?
Yes. Courts in Canada can order this to secure child support or spousal support.
4. What should happen to the beneficiary designation on your life insurance after divorce?
You should review and usually change it, unless the court or agreement says otherwise.
5. Does changing your beneficiary after divorce impact the divorce agreement?
Yes, if your agreement or court order requires your ex-spouse or children to remain beneficiaries.
6. What happens to employer-provided or group life insurance coverage when you get divorced?
Your ex-spouse may lose coverage, and you may need to update beneficiaries or convert the policy.
7. Should you update your life insurance coverage amount after a divorce?
Yes. Your financial responsibilities and dependents may have changed.
8. Do life insurance cancellations or lapses affect child support or spousal support obligations?
They can if life insurance was ordered by the court to secure those payments.
9. How do life insurance policies intersect with court orders and divorce decrees?
Court orders can dictate who must be insured, the coverage amount, and who must be the beneficiary.
10. After divorce, who should be the beneficiary of your life insurance?
Usually your children, new partner, or other dependents.unless your divorce agreement says otherwise.
Final Thoughts
Whether you are discussing life insurance and divorce settlements, you should update your divorce and life insurance beneficiary designations.
Divorce and life insurance policies can either shield your household or cause a legal and financial challenges if not managed properly.
If you are in the process of a divorce or have one finalized, talk to a family lawyer or contact Femi financial planner.
We will assist in ensuring that your life insurance and divorce arrangements effectively serve your best interests and your children.
