How to Update Your Insurance Policies After a Divorce

Going through a divorce is messy no matter how amicable it may be. Division of financial assets, adapting to new living situations, and managing emotions can be draining for all parties involved. 

Besides personal life changes, many practical matters must be resolved during a divorce, including updating your life insurance policy. This is even more important if you have children as it can help secure their future well-being.

This article will explain how to update insurance policies after a divorce in Canada and why this is essential from both a legal and financial standpoint. 

Types of Life Insurance Policies in Canada

The primary purpose of life insurance is to protect your loved ones from financial hardships in the event of your untimely death. 

To do this, there are two types of life insurance policies in Canada: term life insurance and permanent life insurance.

Term life insurance is the most popular and least expensive life insurance product and offers temporary coverage for a specified period usually between 10-30 years. Premium payments are fixed in this type of plan and so is the death benefit. 

Permanent life insurance lasts the lifetime of the policyholder as long as premiums are paid. This type of policy generally has higher premiums and includes a “cash value” or saving component on top of the death benefit which accumulates over time.

How To Update Life Insurance Policies After a Divorce 

Updating life insurance policies after a divorce can be a tricky ordeal regardless of what policy you have. 

Beneficiary designations require updating and policies must be revised to ensure new coverage needs are met.

This must be done by contacting your insurance provider or agent as your divorce doesn’t automatically nullify entitlements. Most life insurance policies will remain “as is” until one or both spouses request a change.

Updating Life Insurance Policies After a Divorce When No Children Are Involved

If there are no children, this process can be a lot easier. You can choose to simply not have life insurance or remove your ex-spouse as a beneficiary from an existing policy post-divorce. 

In the case of permanent life insurance policies, these are often cashed out upon separation with the proceeds split between you and your ex, if there are no children. 

The reason this is done is because permanent life insurance policies have a cash value component that grows with every premium payment made. This cash value earns interest and can be withdrawn at any time. 

The cash value of a permanent or whole life insurance policy is part of a married couple’s net worth and as such is a marital asset that must be divided. 

Once the cash value is withdrawn a permanent life insurance policy can either be surrendered, in which case both spouses will have to get new life insurance policies, or updated to include only the one spouse with the other getting a new policy of their own.

Updating Life Insurance Policies After a Divorce When Children Are Involved

If you have children, the process becomes a little more challenging. 

If you have to pay child support or alimony you may have to keep your ex as a beneficiary on your life insurance policy from a legal standpoint, whether for term or permanent life insurance. Even if you are not obliged to do this you may still want to for the sake of your children. 

If you are receiving alimony or child support and have primary custody of the children, consider investing in a life insurance policy for your ex. Keeping emotions aside, this can be quite important as if your ex were to die, those alimony and child support payments would stop, putting you and your children in a difficult financial situation.

Taking out a life insurance policy on your ex would require their consent but they may be willing to do this as it would help financially protect their children. Also, if you agree to make the premium payments they may not have any issues with it.

NOTE: An insurance policy can only be updated by the owner of the policy. When going through a divorce it is important to know who the owner of the policy is and if needed request a change of ownership to the policy during the divorce. This would ensure that no policy changes can be made without your consent.

What Should Be Updated On Your Insurance Policy After a Divorce?

Apart from beneficiary designations you also need to take a close look at your policy after a divorce. You need to reevaluate your financial circumstances and adjust policy terms, coverage amount, and premium payments based on your new life insurance needs.

To do this it is best to consult with financial advisors and lawyers. These professionals can help you figure out what your financial outlook is going to be post-divorce and what type of policy and coverage amount would be best suited for you moving forward. 

Armed with that information you can now purchase a new policy or adjust your old policy to match your current circumstances with the help of a trusted insurance broker.

FAQs

Q) How do I change my life insurance beneficiary after a divorce?

You can do this by contacting your insurance provider or broker. If you are the policy owner you can replace your ex-spouse as the primary beneficiary with your child, a family member, or an estate.

Q) Can my ex-spouse claim my life insurance if they are no longer a beneficiary?

No, as long as you have updated your insurance policy and named a new beneficiary your ex-spouse won’t have any claim to the death benefit. Only the beneficiaries listed will receive the payout.

Q) What should I consider when buying a new life insurance policy after a divorce?

You should consider consulting with a lawyer, insurance broker, or financial advisor to determine what your financial obligations will be as a single parent and the coverage amount you would need for your loved ones to be financially protected. Based on this information you will then find a policy that matches your coverage needs and your premium budget.