14 December 2012 0 Comments

Life Insurance and Divorce

The 1989 film “The War of the Roses” portrayed the characters played by Michael Douglas and Kathleen Turner in a divorce from hell.  They don’t all go that badly—some are worse.  Life Insurance is often an important element and should never be left to an “oh, by the way” asset.  Setting up life insurance ownership and beneficiary designations should come into play early in the process.  Here are a few of the considerations:

Income Tax

Generally, death proceeds from a life insurance policy are received free of Income Tax.  An exception to this could be when the ownership of the policy was transferred for value to another person.  There are exceptions to this “transfer for value” rule, but spouse or ex-spouse is not one of the original exceptions.  However, Section 1041(b) of the code addressed this and so there now appears to be no problem when the ownership transfer is as the result of divorce proceedings.

If the recipient spouse is owner of the policy, then premiums paid by the providing spouse are deductible as alimony payments and taxable to the recipient spouse and the proceeds will be received income tax free.  If, however, the providing spouse owns the policy, then premium payments are not tax deductible.

Estate Tax

If the policy is owned by the providing spouse, the proceeds will be included in his or her estate.  However, it is the IRS position that if the insurance is required for the benefit of an ex-spouse or children by the terms of a divorce decree, then there will be an offsetting deduction allowed to the estate of the deceased spouse.  Caution:  If there is no such requirement in the decree and the providing spouse owns a policy and independently decides to name an ex-spouse or children as beneficiaries, proceeds will likely be in his or her estate with no corresponding offset.

Assurance that policies remain in  force for benefit of recipient spouse/children

The best way to assure that premiums are maintained for life insurance agreed to in the divorce decree is to have it owned by the recipient spouse and have him or her pay the premium from alimony and/or child support payments.  If the provider spouse is the owner then you could have the recipient spouse named as irrevocable beneficiary and request the insurance company to notify the beneficiary when premiums are in arrears.

Type of insurance

If alimony payments are to continue for more than 20 years, or for the life of the recipient spouse, then permanent insurance should be used.  For child support, term insurance works best with policy durations laddered to coincide with the duration as each child reaches maturity.

Always contact a qualified divorce attorney when determining the correct ownership and beneficiary designations of life insurance involved with divorce.  Information contained in this blog is not intended to provide legal advice.  Seek assistance from a qualified life insurance agent to determine the correct amount of insurance and most effective use of policies to meet your needs…and…better luck next time.  This time for me is going on 50 years and it’s been great!

Next, I’ll be covering the financial dilemmas of Modern Families.

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