Till Death Do Us Part: Life Insurance And Family Law


Life Insurance and Family Law

Life Insurance And Family Law

When handling family law disputes, maintaining life insurance and designating beneficiaries are frequent subjects. Everyone dislikes talking about death, just as they do not like talking about divorce or taxes. This blog post will provide you with the information you need to understand about life insurance and family law.

The Consumer Guide to Life Insurance, a great resource from the North Carolina Department of Insurance, provides a glossary, a straightforward comparison of the benefits and drawbacks of various policy types, and other information in plain language. If the parties reach a consensus over the insurance, they may incorporate it into a separation agreement or have their lawyers include it in a settlement that will be approved by the judge and form a part of the court order.

Key Terms Definitions: Beneficiary, Owner, and Insured

Understanding the definitions of the terms “owner,” “insured,” and “beneficiary” is essential to comprehending these concerns in relation to a divorce.

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What Is Policy and Holding a Policy for life Insurance?

The person or organization with the authority to make decisions regarding the policy, such as modifying the beneficiary designation, taking out a loan against the cash value of the policy, choosing a different settlement option, terminating the policy, etc., is the policy owner.

When crafting a family law ruling, the designation of the policy’s owner should be carefully considered. Closely held companies, business partners, irrevocable life insurance trusts (ILIT), and other third parties are usually the owners of policies. Verify that the spouse is the policy’s legitimate owner before enabling the insurance to be given to your client in a divorce. When divorcing someone, be cautious not to offer to buy out a policy that is owned by a trust, another company, or another person. The policy might not benefit the community.

In a life insurance policy, who is the insured?

Not usually is the insured the owner. The individual whose life is being insured is known as the insured. Multiple lives are covered by certain policies.

What Does a Life Insurance Policy’s Beneficiary Mean?

The individual or organization that gets the insurance proceeds after the insured passes away is known as the beneficiary.

Cases involving Marital Property

Life insurance is just an asset that might be granted to one spouse over the other in circumstances involving marital property. In those situations, the policy is typically given a value by the court. In the event that the policy is whole life, for instance, the court will determine the value by reference to the cash surrender value. In the event that the policy is a term life insurance policy, the court will award the policy owner with a zero cash value because the policy has no value until the policyholder passes away and the death benefit is paid.

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Alimony and Child Support Cases

The purpose of life insurance is to safeguard the source of income for the person getting alimony or child support. A former spouse who is receiving alimony cannot sue the estate for unpaid maintenance because in North Carolina, alimony is not payable after the death of either partner. As a result, life insurance might be a useful tool to fill the financial vacuum left by the death of the former spouse who was providing alimony. Similarly, life insurance might shield the parent receiving child support in child support situations.

Various Choices

Families can organize any kind of arrangement when they come to an out-of-court settlement. They may agree to maintain the policy in force until the final child reaches a particular age if they are utilizing life insurance to collect child support. Alternatively, the parties mutually agree via a contract to keep the beneficiary designation in place indefinitely. While maintaining a lower insurance premium, child support can be obtained by gradually reducing the death benefits. It is important to handle the issue of owners’ capacity to borrow against the value of the policy in specific situations.

Appropriate Designations

Consult an estate planning lawyer for guidance on your life insurance if you have an estate plan in place. If not, before your family law matter is resolved, speak with one. Even something as “simple” as designating the appropriate beneficiary is crucial. For instance, if you’re not careful, making your small child the only beneficiary may be a recipe for trouble. The designation may require the court to designate a guardian, rather than only the surviving parent, and the monies to be held by the courts. The child then has a “estate” that necessitates bookkeeping and yearly accountings of the estate reports to the court.

Alternatively, the parties may decide to designate a trust or an adult as the beneficiary. If and when you decide that your spouse should not get the money from your life insurance policy, amend your beneficiary designations, unless you are required to do so by a court order or separation agreement. If your ex-spouse is still listed as your beneficiary, the beneficiary will continue to be your ex regardless of whether you separate, divorce, get married again, have children, or twenty years goes by.

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Generally speaking, you can modify your life insurance beneficiary at any moment. Request a “change of beneficiary” document from the life insurance provider, Veterans Affairs, the NC State Treasurer, or your HR department if you decide to modify the beneficiary designation on a policy.

Frequently Asked Questions About Life Insurance And Family Law

1. Can life insurance be considered a marital asset in divorce proceedings?

Yes, life insurance may be considered a marital asset, and its value could be subject to division in divorce settlements.

2. How does life insurance impact child support or alimony obligations?

Life insurance can be used as a financial security measure to ensure continued support in the event of the insured’s death, often required in divorce agreements.

3. Can I designate anyone as the beneficiary of my life insurance policy?

Generally, you can choose any beneficiary, but legal restrictions may apply, especially in divorce situations. Consult with legal professionals for guidance.

4. Are life insurance proceeds taxable for the beneficiary?

In most cases, life insurance proceeds are not taxable for the beneficiary. However, exceptions may apply, such as interest earned on the payout.

5. How does life insurance play a role in estate planning?

Life insurance can provide financial support for surviving family members and help cover estate taxes, ensuring a smoother transition of assets.

6. Can a life insurance policy be contested in a family law dispute?

Yes, life insurance policies can be contested based on various grounds, such as disputes over beneficiaries or allegations of fraud.

7. Does life insurance impact child custody arrangements?

While life insurance itself may not directly impact custody, it can play a role in ensuring financial stability for children and may be considered in custody discussions.

8. How often should I review my life insurance policy in light of family law changes?

It’s advisable to review your life insurance policy during significant life events or changes in family circumstances, such as marriage, divorce, or the birth of a child.

9. Can a former spouse be removed as a beneficiary after divorce?

Yes, after a divorce, it’s crucial to update beneficiary designations to reflect current wishes and prevent unintended complications.

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