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Getting divorced is a stressful, emotional, and difficult time. For many individuals, this means untying a lifetime of joint finances, managing their child's education, and dealing with the emotional difficulty of the split. Term insurance plans taken at the time when they were together as a married couple, need to be a part of the activity of dividing their marital assets. This article will discuss the status of term insurance after divorce.
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Note: Know more about what is term insurance first before reading this article.
It will also introduce you to various terms such as assignee, beneficiary, nominee, and the Married Women’s Property Act (MWP).
Upon filing a divorce, the couple generally makes a list of all the assets before deciding how all these assets are to be distributed. Any existing term insurance plans should be a part of this list. So, it is better to assign a financial advisor or planner to make sure that all the assets are listed.
A beneficiary gets term insurance benefits financially from the life of a policyholder, such as a spouse, children, or parents. Generally, either spouse lists the other as a beneficiary in their term insurance plan. The policyholder should change the beneficiary to someone having insurable interest while settling assets during divorce proceedings. This should be informed to the insurance company and change the beneficiary as soon as possible.
The nominee is an individual nominated by a policyholder to take care of the financial assets after their unforeseen demise during the policy term. In the case of marriage, this is generally a spouse. The policyholder should make sure to remove his/her divorced wife/husband as the nominee. Then, it can be assigned to another individual having an insurable interest.
This is the type of beneficiary that cannot be changed. This is selected when the insurance plan is issued. If your partner is an irrevocable beneficiary, the death benefit cannot be changed even after the divorce.
Term Plans
In case of divorce, the spouses could go for joint custody or sole custody. The term insurance plan plays an important role if the non-custodial parents are the first earner. Their term insurance cover will provide the custodial children and spouse financial help in case of the death of a primary earner.
If in case the custodial ex-spouse is the first breadwinner, then it is a good idea to continue with their life cover to make sure the financial security of a family. Though, there are some cases in which custodial ex-spouse might think that the non-custodial spouse is not financially responsible or untrustworthy. This can be the other reason to make sure that the term insurance plan remains with them and that they pay regular premiums for the security of their children.
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An assignee is an individual who is assigned for both the liability and the benefit of the policyholder’s plan. Generally, a partner sets their counterpart as the policy’s assignee. After divorce, the policyholder needs clarification from the ex-partner to make any kind of changes about reassignment or nomination. So, it is important to reassign the plan by the spouse to the other before the proceedings of divorce get complete.
Let’s understand this MWP with the help of an example:
Mr. Kumar has an Rs. 1 Crore term life insurance plan, with his children and wife assigned as the beneficiaries. After some time, the couple gets divorced and the husband keeps the beneficiaries. Subsequently, the husband passes away and it is found that Mr.Rao has a large amount of debt that should be cleared. In such cases, creditors can re-claim their money from the payout.
Section 6 of the MWP Act ensures that these kinds of cases are avoided. If the husband files for a simple MWP Act while buying the term insurance plan, the insurance payout is secured from the debtors. This means that it does not become a part of any estate.
The payout of the insurance is purely the property of the wife, ex-wife, and kids, and debtors cannot make any right about the surviving beneficiaries.
Here is a list of a few insurance tips that you should follow for ensuring that your financial future doesn’t suffer after divorce:
Make sure that you discontinue any joint term insurance plan if you are the only individual that is paying the premium amounts. This may look like a difficult task but is very important because it ensures that there is major credibility to your claims after divorce.
Buying an individual plan is the second step after filing a divorce as this will help to fulfill your dreams based on your financial capabilities and interests.
Maintain a track of the premium amount paid towards a term plan until the lapse time is important. Doing this brings transparency to your records and helps you to prepare your independent financial budget.
Make your own separate financial budget post-divorce and make sure that you change the appointed beneficiaries in your policy documents.
Note: You can easily calculate the term plan premium by using the term insurance calculator online tool.
The foremost thing you should do is remove the name of your spouse as the nominee in a term insurance plan. The newly assigned nominee can be any blood relative
Plans can be settled based on the contribution of each spouse
Re-assess your insurance requirements, especially if you are a single parent. You might need to increase your life cover.
A term insurance plan is not a primary task to be done during a divorce proceeding of a couple. In difficult situations like divorce, it sometimes becomes unseen. However, the consequences of not considering them can be expensive to the ex-partner and children or other beneficiaries/nominees. Therefore, to continue enjoying financial security, one requires to solve the matters associated with term insurance during such proceedings. It will be a tough call in such difficult times, but both parties should keep their emotion aside so that their financial future can be protected.
Note: Check out the best term insurance plan in India and choose one that suits your requirements.
†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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