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A divorce is an event that takes a toll on both the parties involved, often followed by significant financial distress. The status of the life insurance beneficiary in the case of a divorced couple has gained a lot of attention in recent times. Insurers have been frequently asked about the legitimacy of claim proceedings when an ex-wife is still listed as the beneficiary.
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Divorces have always been a murky business for both the parties involved, especially when it comes to matters of finances. Throughout the entire duration of all the messy legal proceedings, one often tends to overlook the life insurance aspect of it.
It is often recommended to make changes to the named beneficiary upon separation before court proceedings. The replaced beneficiary should be someone with an insurable interest. It is advised that one remove their spouse and name their child as a potential life insurance beneficiary before finalizing the terms of a divorce. A life insurance child beneficiary makes sense as the benefit amount helps take care of their future financial needs in the absence of an earning parent.
Most often, a court decrees that the primary financier with a child maintains a life insurance policy for the sole benefit of the child. It is important to remember that a child below the age of 18 will not have access to the funds directly. Therefore, it is upon you to assign a trusted member or your ex-spouse who will take care of the benefit amount until the child reaches legal age.
If you are a homemaker and find yourself dependent on your ex-spouse for financial support, you need to ensure that they invest in life insurance as part of the divorce settlement. There are multiple reasons why you should include life insurance in your divorce settlements.
If the insured spouse dies, the alimony will remain protected by the account of the death benefit amount.
The death benefit amount can fund your child’s education.
The amount can also take care of your needs post-retirement.
In divorce settlements, the breadwinner is usually required to offer alimony as part of child support. A court may order the spouse who owes alimony or child support to insure themselves under a life insurance cover. The court, in such situations, mostly decrees that the financially dependent spouse be named the beneficiary of the life insurance policy. Therefore, court-ordered life insurance may work in your favor if you have primary custody of the child.
Remember that there is a timeline to be adhered to in such situations. You should also coordinate with your ex-spouse regarding the life insurance coverage amount, the policy term, the ownership of the policy, and the premium paying terms. This ensures that there are no hiccups during the final processing of divorce settlements and/or claims.
During divorce settlements, each party needs to list down their assets and then decide how to divide these among the parties involved. It is prudent to list life insurance covers as assets wherein the assigned nominee is the former spouse. Policyholders are required to name a beneficiary who can officially claim the death benefits.
Note that the divorce decree under a life insurance scheme is legally binding, and one cannot change the named beneficiary if it is court-ordered. Furthermore, a life insurance divorce decree cannot override a named beneficiary in case the option for ‘irrevocable beneficiary’ was chosen at the time of policy issuance.
In the case of amicable separation or no dispute resolutions, one can replace the named beneficiary should they wish to. The intent to change beneficiaries should be intimated to the insurance provider. Note that only the policyholder has the right to make such changes to the policy.
Married Women’s Property Act (MWPA) of 1874 protects the interest of married women in terms of the entitled benefits of their spouses’ life insurance. The beneficiary defined under the MWPA cannot be changed once the policy has been issued.
The only eligible beneficiaries of life insurance under the MWP Act can be the wife or the child, or both the wife and the child of the life assured. Only the beneficiary assigned by the policyholder is entitled to the sum assured of death of the life assured.
Any married man who is a resident of India can purchase an insurance cover under the Married Women's Property Act. Even if you survive the maturity of the policy, the maturity benefits are payable to the assigned beneficiary(s) only.
If you and your wife were to divorce later, the life insurance clause in a separation agreement under the MWPA states that the beneficiary, once assigned cannot be changed. Therefore, if you have assigned your wife as the primary beneficiary at the time of policy issuance and you decide to separate, all the proceeds will go on to your wife only.
The utility of a joint-life cover after divorce has raised questions in the past. While the conditions are standard across all plans, the insurance on the life of your spouse shall lapse in case of divorce or annulment of marriage. When two people separate, their life insurance needs will change. Therefore, a divorced couple may have to let their joint-life cover lapse and invest in separate covers.
It is important to remember that getting separate covers at this stage will cost you significantly higher than what you were paying for a joint life cover. This is because premium prices increase with age and your health.
The increased premiums, however, should not deter you from investing in individual life insurance coverage. Let’s say, for instance, the policyholder of a joint-life cover has not been able to pay the premiums to keep the policy active. In such cases, it is prudent that you have a life cover of your own that is comprehensive enough to financially support your dependents in case of your untimely death.
If the ex-spouse is still listed as the beneficiary and no effort has been made by the insured to contest or change it, (s)he can collect proceeds from a life insurance cover. The rules, however, might differ across insurance companies and types of policies. Some policies simply lapse in case of a divorce or annulment of marriage. You are advised to contact your insurer before claiming any benefit.
Only the policyholder has the right to change the beneficiary.
The former spouse is entitled to the death benefits if the beneficiary has not been updated post-separation.
Court-ordered life insurance may be assigned as an alternative to alimony on the death of the life assured.
A child beneficiary cannot receive the benefit amount until (s)he reaches the age of 18. The policyholder should assign a trustee for the time being.
If you buy a policy under the MWPA or assign an irrevocable beneficiary, you cannot change the terms later.
Both the separated parties should get individual covers that are comprehensive enough to finance the future of their dependents.
The life insurance beneficiary rules after divorce are fairly straightforward. Despite clear guidelines, there is a lot of confusion at the time of actually claiming the benefits. Remember that if you are still the named beneficiary and there is no clause related to policy lapse in case of a divorce, the insurer is liable to pay you the benefit amount.
This is even more important if you have a child to support. On the death of the spouse who is financing your life and the child’s, the life insurance proceeds act as a safe financial backup to protect alimony. Further, if you are financially dependent on your spouse, you should especially contest for your spouse’s life insurance cover and to be named the primary beneficiary.
However, companies usually recommend upgrading or re-evaluating your life insurance needs to post a divorce. This ensures that there is less hassle at the time of claim proceedings. Further, it is prudent to inform the former beneficiary of the changes made so that there is no gap in expectations.
It is advisable to get help from a financial advisor before dividing assets in a divorce settlement. Further, premium payments should be maintained on the terms set to avoid any lapses in the policy.
Note: It is suggested to calculate the term plan premium on the term policy calculator online tool by Policybazaar before buying.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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