cost-life-insurance

Life Insurance After Divorce

Following a divorce there are assets that need sorting and life insurance is one of them.

Getting divorced can be an incredibly stressful and emotional process, but it can also have significant financial consequences. If you’re one of the almost 50,000 Australian couples that get divorced each year, it’s vital to make sure your finances are protected and that you’re well placed to manage your money now and into the future.

One of the most important financial issues you should consider after divorce is ensuring that you have adequate life insurance cover in place.

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What happens to my finances if I get divorced?

If you and your partner get divorced, your property, assets and debts will be split up. If you and your ex can agree to divide everything mutually, this process can actually run a lot more smoothly than you might expect.

If an agreeable settlement can't be reached

Things can get much more complicated. There is no set formula the Family Court of Australia uses to divide assets between separating spouses; instead, a decision is made after all the evidence has been heard in order to reach a division that is “just and equitable”. The court will consider:

  • Your assets and debts
  • The future financial requirements of each person, such as their financial resources, ability to earn money in the future, and who will care for any children
  • The non-financial contribution of each party, for example caring for children and home duties
  • The financial contribution you and your former spouse made to the marriage, including wages, gifts and inheritances

What does this mean for your finances?

The division of property and assets won’t necessarily be equal; your spouse may get more than you, or vice versa.

shutterstock life insurance form 450x250

What are the implications of divorce for life insurance?

When you have life insurance cover, you nominate who will receive the policy’s lump sum benefit if you die. This person is known as the “beneficiary” and if you took out cover when you were married or in a de facto relationship, there’s a pretty good chance you would have nominated your spouse as the beneficiary on your life insurance policy.

1. You'll need to adjust who is paid out on your policy

So if you and your life partner are getting divorced, it’s essential that you update your life insurance policy to reflect your changing circumstances. By nominating a new beneficiary or beneficiaries, you can ensure that any proceeds from your life insurance policy go to the people you want.

2. You'll need to check if your cover is still adequate for your needs.

Your income, assets and debts can all change when you go through a divorce, so life insurance that was once appropriate may no longer provide sufficient cover. Review your policy and the features it includes before deciding whether you may need to increase your level of cover.

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Tweaking your policy and beneficiaries following separation

The way you sort your policy depends on how the policy was bought. You may of bought cover with

  1. One or two seperate policies or;
  2. A joint policy

If life insurance that was bought with separate policies

In the event that you and your partner had a separate life insurance policies, the management of the policy is relatively straightforward. since the policies are in no way joined, you can simply update your beneficiaries (who is paid out in the event of a death).

Steps to changing your beneficiary

  1. Contact your estate planner or superfund trustee. If you have an estate planner get in touch with them to update your policy.
  2. Contact your insurer. If you don't have a planner or a trustee, get in touch with your insurer. They will be able to provide you with the requisite forms for changing your beneficiaries.
  3. Complete the forms. Fill out necessary documentation and return them to your insurer.

Options for people with joint life insurance after divorce

This is a little more tricky. But there are a few options out there.

1. Maintain the policy

Many divorced couples simply maintain the policy after their separation and agree to terms for managing the premium payment. For example, you could manage the premium payment of the policy and your ex-partner would simply direct regular funds to your account over the life of the policy. It's usually best to have some form of legal agreement in place if this is the avenue the you decide to take.

2. One policyholder maintain the policy

Another option is to transferred the ownership of the policy into either you or your ex's name. This will mean one of you will need to find a new policy. The problem with this solution is you'll have to work out a payment for premiums paid in the past.

3. Cancel the policy and take out separate policies

One final option if you have a couples life insurance policy is to simply cancel the policy. This option has its pros and cons

  • Simple solution
  • No need to update beneficiaries
  • Ability to tailor new cover
  • Risk of increased premiums if you took out level premiums at an early age
  • May have to undergo medical underwriting

Should you keep the policy after divorce?

You may not want to bother with life insurance after the breakup, since you no longer have a partner who relies on you. However, if you have family and kids then it's important you ensure you have adequate cover in place. If you're now the sole provider in your home, it becomes even more important to cover that offers the necessary benefits and features. Prior to your separation or divorce your kids would always have had one of you to rely on should something happen to the other.

Whether you amend your existing life insurance policy or whether you end up switching insurers, you should make sure you take out a policy that is suited to your needs, provides adequate cover, and is affordable.

Reviewing your life insurance after a divorce settlement

If you are interested in adjusting your current life insurance policy following divorce or cancelling it altogether, here are some key considerations to make:

    • Sum-insured based on remaining financial obligations
    • Changes to your occupation and how this may impact premiums
    • Changes to your salary
    • New assets that you have acquired
    • Any life cover that has accumulated in your superannuation
    • Any additional cover options e.g. TPD or Trauma Cover
    • Adjustment of your policy beneficiaries
    • Policy design including payment of your premiums
    • How your health may have changed since taking out your first policy

These are just some of the things you will need to consider. An insurance specialist can help you assess your current situation to adjust your current cover or find a new policy.

superannuation

What are the implications of divorce for superannuation?

A 2013 study by Suncorp found that superannuation is often forgotten during divorce settlements, with only 17% of all divorcees considering super during divorce proceedings. When you consider that super is likely the second-largest asset you’ll ever own (the family home comes first), this low figure is quite remarkable.

While not mandatory, divorcing couples can value their superannuation and split superannuation payments, and super can be divided by agreement or by court order. If you’re getting divorced, you could be entitled to up to 50% of your partner’s superannuation, which could help ensure a much more secure and comfortable retirement.

Life Insurance inside super

It’s important to remember that many of us hold one or more forms of life insurance through our super. When getting divorced you’ll need to update the beneficiaries of any death cover you hold through your super fund to make sure any policy proceeds go to your intended recipient if you die.

Life insurance benefits in super don’t go straight to your beneficiary, but instead are first paid to the super fund’s trustee. It’s then up to the fund’s trustee to distribute the benefits.

Types of nominations for super policies (you may need to update these)

There are three options when nominating a beneficiary on life insurance held inside super:

  • A binding nomination. The trustee must pay the death benefit to your nominated beneficiary.
  • A non-binding nomination. This provides guidance on who the death benefit should be paid to, but the trustee can use their discretion when deciding whether the benefit should be directed to another person.
  • No nomination. If you don’t nominate anyone, the super fund trustee decides who receives the benefits.

Case Study

Binding and non-binding beneficiaries

After 12 years of marriage, Luke and Vicky filed for divorce in 2008. After protracted legal negotiations and disputes, the former couple reached a divorce settlement in mid-2009 and went their separate ways.

But while Vicky remembered to close all her joint bank accounts, credit cards and other financial products she shared with Luke, she forgot to think about her super. In fact, Vicky was completely oblivious to the fact that she still had a binding death benefit nomination in place with her super fund, stipulating that any death benefit payable from her superannuation life insurance MUST go to Luke.

So when Vicky suffered a heart attack and passed away in 2016, instead of providing financial support for her two children, the $500,000 death benefit went straight to her ex-husband. Had she updated her nomination, this situation could have been avoided.

What other financial matters need to be taken care of when a divorce happens?

Podcast: Co-founder of finder.com.au Fred Schebesta discusses the challenges of divorce

As well as sorting out your life insurance and your super, there are plenty of other financial matters you’ll need to sort out after divorce. These include:

  • Bank accounts. Make sure to close any joint transaction or savings accounts you held with your ex, and open new accounts that only you can access. Also remember to ensure that your income is paid into the new account.
  • Credit cards. Did you and your former spouse hold a joint credit card? Make sure to close this account and apply for a card in your own name.
  • Home loan. There are several options available when sorting out your home loan and property ownership between you and your former spouse. For example, you might want to buy out your ex’s share of the property, or perhaps sell the property and split the profits. Our guide to refinancing after a divorce contains a whole lot of useful information to help you plan your next step.
  • Other debts. Car loans, personal loans and other debts you share with your former spouse will also need to be taken care of. Let your lender know you have separated from your partner and then work out your next steps.
  • Utility bills. Are you keeping the family home after your ex moves out? If so, remember that you’ll need to cover the utility bills on your own. Make sure they’re in your name only or, if you’re moving out, get your name taken off all accounts.
  • Other types of insurance. Once your life insurance is sorted, don’t forget about the other types of insurance you may have jointly owned with your former spouse. These include health insurance, home and contents insurance and even car insurance, and all policies should be reviewed so you can be sure they still offer the right level of cover.
  • Investment accounts. From share dividends to managed funds and other investment accounts, it’s essential that you take stock of your finances during divorce. You’ll need to sort out who gets what in the split, as well as what you’ll need to do to manage your investments moving forward.
  • Your will. Getting divorced doesn’t automatically cancel an existing will, so consider updating your will to reflect your changed relationship status. Your solicitor can guide you through the process of changing your will.

Dealing with all the financial issues surrounding divorce can be a minefield. Your solicitor can advise you of all your legal rights and responsibilities right throughout the process, while you may also benefit from seeking help from an experienced financial planner.

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Richard Laycock

Richard is the insurance editor at finder.com.au. He is on a mission to make insurance easier to understand.

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