Insurance is one of the more complex issues presented by divorce. Health, car, homeowner, and property insurance are common types of insurance that can be viewed as assets in a marriage. Consequently, upon divorce, the responsibility and cost of maintaining the necessary policies by paying the premiums must be taken into consideration; this is often part of the divorce settlement.
Federal laws regulating health and other types of federally regulated insurance may allow partners in a marriage to continue the policies after divorce; they require insurers to continue to provide coverage for up to 36 months before the insured individuals must apply for independent coverage. It may be necessary to determine whether or not an ex-spouse will be able to qualify for coverage at the end of the COBRA-mandated period.
In the event that pre-existing health conditions or disabilities make it impossible for an ex-spouse to obtain independent coverage, it will be necessary to negotiate adequate provisions to meet such expenses beyond the COBRA-mandated period. Furthermore, conditional provisions, with accompanying insurance arrangements, may be advised to protect against possible changes in health or disability conditions.
In many cases, people also carry long-term care policies or, as part of their retirement portfolios, have insurance policies. Accounting for these assets, equitably dividing them, and providing for the continuation of coverage is more and more important in divorce settlements. This is because younger people are anticipating and providing for such needs earlier in life and also because divorce affects couples of all ages and, in some cases, even very lengthy marital unions.
Life and disability insurance are of particular importance. Because many life insurance policies may have accumulated cash values, these must be accounted for in the division of assets. However, usually getting the cash surrender value of these policies will result in termination of coverage under the policy as written or, at the least, in loan charges and an obligation to repay the cash amount or to reduce coverage. As this may not be an acceptable result, particularly where continued coverage is necessary, other financial arrangements may be needed to account for these assets.
Almost all divorce cases involve dealing with the continuation of existing life insurance and disability policies. One of the reasons is the specifics regarding why the coverage was obtained may change due to the divorce, which, in turn, will likely have some impact on the spouse’s ability to keep the policies in force as they were initially written. It is also very important note that a divorce will raise the issue of whether, after the divorce, one partner keeps an insurable interest in the life of the other partner, or the ability to keep earning an income at levels established or expected at the time of divorce. While past laws had disallowed such coverage on the grounds that an insurable interest had ceased to exist, newer laws, for the most part, recognize that spouses may have a continuing financial duties to each other and their offspring.
Also of note, in most cases, an accident or death that would impact the ability of a supporting partner to meet support or other financial obligations (such as child support, tuition, etc), should be anticipated and taken into consideration in divorce settlement negotiations. To the degree possible, it is probably advisable to carry insurance adequate to meet the expenses of any such obligations, should one or both responsible spouses pass away, particularly during a foreseeable period when such obligations may exist.
At the time of divorce, it is often prudent that one or both spouses purchase additional coverage, take out additional policies, transfer ownership of such policies, or make certain that beneficiary designations are updated. Coverage must be proportionate with determined needs and expectations; excessive coverage will likely be disallowed or contested by insurers. Failure to change a beneficiary designation can result in to serious consequences and court actions upon the death of the insured. These lawsuits may also include those initiated by insurance companies to resolve the complicated and sensitive issue of who receives the claim payments.
These lawsuits, called interpleaders, protect insurance companies from having to pay more than one claim on a policy and are brought by an interested third party, usually the insurance company. Interpleaders require the court to determine who should receive the funds paid by the insurance company or party initiating the lawsuit to the court. While interpleaders protect insurance companies, they can also potentially delay payment of much needed funds during periods of stress and trauma. They can also be quite expensive.
It is prudent to include, on the divorce decree, clear and specific provisions with regard to all insurance policies on an itemized basis. This is to minimize the confusion that would otherwise result once the divorce is final, as well as spare the parties later negotiations, which has both practical and emotional benefits. These provisions must clearly reflect the intent of the parties and must be easily understood by third parties.
An attorney should be involved in these matters, to ensure that all conditions are satisfied for any modifications in the insurance policies, so that they will conform to the final divorce decree. This will help to limit or prevent confusion and added expense, particularly if the insured person should pass away during the period of the policy. It can also protect beneficiaries against hostile actions seeking to deny them access to policy claims in cases where ownership interests should have been transferred or shared. However, some transfers of ownership may affect the ability to continue the policy on the terms on which it was originally written; the ability to understand the policy and to negotiate with the insurance company may prove important here as well.