Pat McIver

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.

Insurance provides couples with much-needed financial security for their families in the event of the death of one or both partners. Recognizing this, insurance providers started to provide joint lie insurance policies for couples, advertising them as being cost-effective and providing coverage to both partners for the price of one insurance policy.

However, the matter is not as simple as that. Other factors decide the cost of a joint insurance policy including the age, health, and financial goals of the partners.

Today we’ll be giving you an understanding of joint insurance policies, their cost-effectiveness, and the overall pros and cons of joint insurance policies. Hopefully, this will enable you to make an informed decision and choose the right insurance plan for your family.

Understanding Joint Life Insurance Policies

Joint life insurance policies insure couples under the same policy, rather than both partners purchasing two separate policies. Joint life insurance policies have several pros and cons, which we’ll discuss shortly, and there are two main types, “first-to-die” policies and “second-to-die” policies.

In “first-to-die” policies, a death benefit is paid by the insurer upon the death of any one partner. These proceeds can be used by the surviving partner to cover funeral expenses and set up a fixed income account to replace the income of the partner who has passed away.

In “second-to-die” policies, the insurer will pay benefits only in the event both partners have died. These policies are used to cover the funeral expenses of the second partner and for their children or other beneficiaries to benefit.

Even though joint insurance policies cover two people, only one premium is paid, making it cheaper than subscribing to two individual insurance policies. However, if you’re looking for flexibility in terms and coverage amounts, then you might want to consider an individual insurance policy for both partners.

Cost-Effectiveness Factors

While there is no doubt that one joint insurance policy can be cheaper than two individual policies, you need to look beyond just that to accurately assess whether joint policies are cost-effective.

For example, if there’s a significant age gap between the partners or health differences, with one partner being healthy and active, while the other is not, then the cost of the joint policy rises and the coverage could also reduce. In such cases, it might be better to opt for individual policies so at least one partner could have decent coverage while paying a low cost.

You also want to consider your long-term financial goals and ensure whether a rigid investment option like a joint insurance policy is right for you. When it comes to estate planning, you would want an investment option that is a bit more flexible as a person’s financial circumstances and strategy can change as time passes.

Pros and Cons of Joint Life Insurance

Pros

The first pro is the cost factor. Normally a joint insurance policy should cost less than two individual policies, but this is not always true. If there are differences in age and health of the couples, then you might end up paying just as much as you would for individual policies, while also getting less coverage.

Joint policies are specifically tailored for couples and are also easier to apply for, as there’s only a single application to deal with, which significantly reduces processing times and instances of approval.

Cons

The first and foremost con of joint policies is rigidity. Even though both partners have different needs, financial circumstances, and coverage requirements, the joint policy will offer the same amount and term for both partners.

As such, if you and your partner have different needs and circumstances, then you should definitely consider an individual policy instead.

Moreover, in the event the couple decides to split up or divorce, the policy won’t be divided. You would need to keep the policy going, transfer the policy to one partner, or cancel the policy altogether.

Another con is the single payout which, in the case of first-to-die policies, would mean the surviving partner receives a payout but is without any coverage following the payout unless a new insurance policy is purchased.

FAQs

Q) Are joint life insurance policies always cheaper than individual policies for couples?

They can be cheaper, but not in every circumstance. The cost of a joint insurance policy will heavily depend on the age and health of both partners and also on their personal financial circumstances and goals. For example, if one partner is healthy and young and the other is significantly older and not in as good health, then you’ll likely encounter expensive premiums and low coverage amounts.

Q) Can both partners be covered equally under a joint life insurance policy?

Both partners are covered equally, but the payout structure might defer depending on the type of joint policy the couple chooses. In first-to-die policies, the policy will pay out a benefit on the death of any one partner, whereas in second-to-die policies the payout only comes when both partners have passed away.

Q) Is it possible to convert a joint life insurance policy into individual policies? 

You might be able to find such a policy, but not every insurance provider will allow for a conversion. It would be best to review a few different insurance providers to find the plan that best suits your needs and wants.

Q) How do joint life insurance policies fit into estate planning? 

A second-to-die joint insurance policy can be used for estate planning, as that is the only policy that would pay to the heirs and be considered as part of the estate. First-to-die policies will give a payout to the survivor, which doesn’t come into the ambit of estate planning.

Speaking To An Insurance Expert

Sometimes choosing the right insurance plan or policy is only possible after speaking to an insurance expert. At McIver Insurance, you can rest assured that you will be given in-depth and accurate advice, to ensure you have the right insurance plan to give your family the best financial protection possible.

An insurance policy gives a great deal of comfort, as it ensures that your loved ones are provided for in the event of your demise. However, you should not be opting for the first insurance plan that comes your way and, as an expatriate, there are many considerations you should take into account before deciding.

Some of these include your financial circumstances, tax implications (especially for U.S. citizens), medical examinations, and accessibility for beneficiaries. We’ll be discussing all these factors to give you a better idea of the entire framework, allowing you to make an informed decision.

Evaluating Life Insurance Needs for Expatriates

The first step to evaluating what insurance you should purchase in Canada is to evaluate your needs. Everyone’s financial circumstances are different, as are their means of making money, so you need to really sit and carefully consider every aspect.

Some of the factors you should be considering are your income, how much surplus you have at the end of the month, the number of dependents, your current debts, and your overall financial goals.

One example that would help you understand is a person with a well-paying job who has one child, no outstanding debts, an education fund for his child’s university, and a savings account that has enough money to provide a fixed-income for his wife and child and to take care of any emergencies. For such a person it may not be necessary to purchase insurance with a high coverage amount; it could be just enough to pay for the funeral costs.

Conversely, take a person who has a steady job, with multiple children, a mortgage, car payments, credit card debt, and no significant savings. For such a person it might be wiser to purchase an insurance plan that offers a high coverage to cover the costs of the funeral, and, in the long run, basic expenses and education.

You also should consider personal factors as well in your capacity as an expatriate. If the nature of your job is high-risk, then make sure that such risks are specifically covered under your insurance plan. If you’re a retiree, then you should consider whether you would be able to afford insurance coverage or if you’ll find a provider that is willing to provide you coverage considering your age and employment status.

Navigating Tax Implications for U.S. Citizens

The United States imposes significant estate and gift taxes, at a tax rate ranging from 14% to 40%. This is the applicable tax at the federal level and there may also be additional taxes at the state level. 

One strategy for bypassing this tax is to set up an irrevocable life insurance trust and make your insurance policy an asset of such a trust. This would allow your beneficiaries to receive their benefits without having to be subject to any taxes.

Another strategy is to ensure that funding and premium payments for any policies are done through corporations. You can see a significant reduction in the applicable tax rate if you choose to use this strategy.

U.S. Tax Compliance and Policy Eligibility

While we have mentioned gift and estate taxes above, for those to apply your insurance policy would need to qualify as a life insurance policy as defined under the United States tax framework. 

If not, then the policy would fall under the income tax umbrella, and you would need to pay income tax which would be calculated by taking into account the benefit amount and the cash surrender. In other words, you would be paying taxes on income to which you don’t have access.

Another outcome of non-compliance is an excise tax on premiums, amounting to 1% of the payable premium. As such, there could be associated costs to keeping an insurance policy considering these income and excise tax implications.

To judge if an insurance policy falls under the U.S. tax framework, there are 2 tests. The guideline premium test and the cash value accumulation test.

Unfortunately, these tests require a professional, which will cost a great deal of money, or a certification from the insurer, which can be difficult to obtain. Regardless, you should try to get an insurance policy that has been certified as compliant with U.S. tax requirements or speak to an advisor for further options.

Understanding Medical Examination Requirements

A medical examination is necessary for finalizing an insurance policy, as it allows the insurance provider to assess your overall health and screen for any pre-existing conditions to ensure your eligibility for the insurance plan.

Under the Canadian tax framework, only a licensed healthcare professional who has been appointed by the insurer can carry out the medical examination. The examination will include a physical assessment along with tests and should not take too long to complete.

You might be required to fast or avoid food or certain medications before your examination, so be sure to follow all instructions properly. Failing this, you might be required to go through the examination again or you might compromise your test results which will create problems in finalizing your policy.

Ensuring Your Beneficiaries Have Access

The two biggest challenges for an expatriate and their beneficiaries under an insurance policy are choosing the right beneficiaries and a lack of awareness on the part of the beneficiaries regarding the insurance policy. 

When choosing your beneficiaries, ensure that they are financially literate and responsible enough to deal with the large sum of money that is to be obtained from the insurer upon your death. Make sure you give clear written instructions to these beneficiaries on how the money is to be used and have copies of such instructions placed with trusted third parties as well to ensure beneficiaries carry out your instructions.

You also need to keep communicating with your beneficiaries and keep them updated as to where your insurance policy is so they can access it and initiate the proceedings for obtaining the benefits.

Speaking To An Expert

Navigating insurance policies and their tax implications can be a complicated affair and it might be best to speak to an expert. At McIver Insurance you’re sure to find an expert who can advise you in detail on what insurance policy best suits your needs and how best to tackle it from a tax perspective.