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| The Basics | Dump the spouse, but keep the insurance
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Splitting up changes everything, including whether or not you and your children, your house and your cars are covered. Here's a checklist.
By Ginger Applegarth
For many couples, January means seeing lawyers.
I dont mean to be coy, but I find that many couples whose marriages are crumbling choose January to start the process of ending things.
If youre in that position, there are a ton of issues to sort out. One of the most important is insurance. And thats when you discover how complicated your life has become. So, fair warning: ignore your insurance at your own risk.
The insurance decisions you make now (or don't make) can wind up costing you more than you ever imagined. Divorce laws vary by state, further complicating the issue. A good insurance agent can help make sure youre protected, but here are some areas to think about and moves you might want to make.
Life insurance
Life insurance usually involves a lot of money, so it pays to think through the issues carefully.
Getting the spouse off the policy. Chances are you named your spouse as the beneficiary of your life insurance policies. Thats probably not what you want now. Heres what may happen: - Divorce laws in some states automatically invalidate an insurance designation naming an ex-spouse as beneficiary. Proceeds would then go to the contingent beneficiary you named in your life insurance application.
- If your state doesnt invalidate insurance designations, your ex-spouse remains the beneficiary until you replace him or her. If you die without changing your policy, your ex will get the money. Your new spouse or other heirs will be very unhappy. The solution: get those designations changed.
Taking care of the kids. Be sure your divorce agreement requires the spouse who is paying alimony and/or child support to have enough life insurance to cover those payments if he dies. Each of you should carry enough insurance for each of your shares of your children's education and other expenses. If your divorce is acrimonious, however, or your ex develops money troubles, he or she might be tempted to stop paying premiums and cancel the policies. Have your divorce decree require your ex-spouse to offer proof, at least annually, that the policies are still in force with the beneficiary unchanged. If the policies aren't in force and the spouse dies, then have the decree require that your exs estate pay you that amount out of the estates assets.- A note: Unfortunately, if the policy lapses, the insurance company isn't required to reinstate it. The easiest way I know to avoid this problem is for you to own and pay the premiums on the policy. Your ex could reimburse you, but youre sure the premiums are paid.
Dont name minor children as beneficiaries. This is a common mistake, and it can complicate matters in naming a guardian for the funds. The solution: set up a family trust under your will and make the trust the beneficiary.
Do you want the ex to get some insurance benefit? Submit a new beneficiary designation form to show your intention. Otherwise, when you die, your new spouse or other heirs may try to claim the insurance for themselves.
Pay attention to who owns the policy. The owner of a life insurance policy makes all decisions, such as changing a beneficiary and the amount of insurance. So, if youre covered through your ex-spouse's group life insurance policy (as part of a "family rider"), your spouse can drop your insurance. Your divorce decree can require your ex to keep you on the policy, but you are probably better off getting your own insurance.
For more information, MSN Money has a life insurance needs calculator that can help you figure out how much insurance each of you should have. (See link at left.)
If your divorce is friendly, you may not think it necessary to include all these provisions in your divorce agreement. Wrong. Your relationship with your ex will change over time -- and not necessarily for the better. Better be safe than sorry.
Medical insurance
If you and your children are covered under your spouse's medical insurance, you usually have some protection against losing the coverage in a divorce. Here are the details.
You get up to 36 months. An ex-spouse generally can keep medical insurance through the other's group policy for up to 36 months after the divorce.
The kids can be covered until theyre adults. Federal law mandates that your children be covered until they are adults, even if they aren't "dependents" for tax purposes. So, your kids can live with you but still get medical coverage. And you don't have to deal directly with your ex when you submit claims or get reimbursements. Your state court can issue a Qualified Medical Child Support Order. If you and your spouse both have group insurance on your kids, the "birthday rule" applies. Primary coverage is provided through the spouse with the earliest birth month and day during the year. If one spouse has group insurance and the other has an individual policy, the group policy is used first.
Check the HMO rules. They have limits, especially when you move away from your ex-spouse. If you and/or your kids are covered under an HMO, you may only be covered for emergencies.
Check for your group coverage at work. Even if you didn't enroll when you were first hired, you may be able to do so now that your legal status is changing, or once a year during open enrollment.
Homeowners insurance
If you have moved from your "marital home," you may be in for a nasty surprise. Here are some pitfalls:
If youre not a named insured. That means only your spouse's name is listed. In that case, your personal property such as clothing and jewelry isn't covered. This can be confusing, especially if you were paying extra to cover expensive jewelry and the like. But if you were only insured as a "resident relative" to your spouse, whose name is on the policy, then you have big problems. .
When you move out. Even if youre not yet divorced, you lose your insurance if you move out and your name isn't on the policy. Youll need a new policy for your new home (even if youre renting). Be sure that personal property (jewelry, furs, antiques, etc.) listed individually on your old policy is covered under the new one. Many an angry ex-spouse has canceled the rider that covers the others property.
Make sure the coverage is right. Even if you are a "named insured" on the policy, your personal property is not fully protected once you move out because you are living in a home "other than the resident premises." That means that your personal property is only eligible for 10% of the coverage listed in your homeowners policy.
Keep the liability coverage. Often, divorcing spouses agree to jointly own their house until the children are grown. If you own all or part of the house but dont live there, youre still exposed to lawsuits from any injuries that happen on the property. So make sure you have enough liability coverage. And follow these steps: - Make sure youre listed as a named insured on the policy.
- Tell your insurance agent and company in writing that youre divorcing but will remain an owner of the house. Therefore, you must give written permission for any changes to the policy, including cancellation of the policy.
- Buy an umbrella liability policy to pay for claims that exceed your home or auto policies.
Automobile insurance
Auto coverage is a real minefield. You may have less insurance and more liability than you could have ever imagined. Heres what to keep in mind.
Is the policy listed in both names? If youre merely listed as a driver on your policy, you will lose your auto coverage when you move out. Buy a new policy that accurately states where the car is kept. Otherwise, if you live elsewhere, the insurance company will deny claims because you didnt tell them about the location change.
Its your car, but they drive it. If you let your ex-spouse or children drive a car you own, youre liable in an accident. It doesn't matter if you aren't listed as a driver.
Make sure youre listed as a named insured. Write your agent and company a letter stating that you must approve all changes in writing, including cancellation of the policy. Also, you'll need an umbrella liability policy for large claims. Make sure that everyone driving the car, including kids and babysitters, is listed on the policy as a driver.
Disability insurance
Your disability insurance isn't directly affected by your divorce, because your existing disability policy is only for your earned income, not your spouse's. But there is one big issue to consider.
Keep maximum coverage going. If your spouse suffers a disability and cant pay alimony or child support, itll be tough for you to collect that money. But if the decree requires you to pay alimony or child support, your disability benefits will have to pay those obligations first. There probably won't be much left over for you. So, be sure you keep your maximum coverage. And be sure the decree requires your ex to keep maximum coverage as well. If either of you needs more, get it.
One last note: If you fear that your soon-to-be-ex will drop any insurance before the divorce is final, have your lawyer obtain an order prohibiting your spouse from making any reductions to current coverages. This may antagonize your spouse, but losing that coverage could have disastrous consequences for you.
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