No matter the circumstances, divorce can be painful—both emotionally and financially, including issues surrounding various types of insurance policies. As you work through your finances, be sure to consider the insurance implications of divorce.
Auto insurance
A divorced or separated couple will need to decide who will wind up with any car (or cars), and a change in car ownership will also mean a change in insurance. First, let your insurance company know about any change of address. Also, inform the company about who will now be driving which car, and be sure to make the company aware of any update to the type or amount of driving that will be done. These details will have an effect on your insurance premium.
In most states, if one of you has to buy a new car, new insurance will need to be arranged before the car is registered. Removing your former partner from your auto insurance policy also protects you from possible liability if he or she is involved in an accident and gets sued.
Homeowner’s or renter’s insurance
Divorce will typically mean a change of address for one or both parties, and your current insurer needs to know when there is a change in residence and property coverage. For example, if your ex receives the jewelry in the divorce settlement, your insurer will need to know whether to cancel any special coverage for expensive jewelry on your policy. Likewise, if security modifications are made to your home because your ex has moved out and you are now living alone, the insurance company will need to be notified. Those security upgrades may help you qualify for a discounted rate on your homeowner’s insurance policy.
On the other hand, if you’re moving from an owner-occupied home to a rental property, you may want to consider getting renter’s insurance to cover personal possessions and liability.
Life insurance
Many married couples buy life insurance to cover existing and anticipated debts and financial obligations. When a couple divorces, these obligations generally still exist, and life insurance should be considered as part of the final divorce decree.
Married couples typically list each other as the beneficiary on life insurance policies, and there may be good reasons to keep life insurance on a former partner. For example, if the person who is providing alimony and child support dies, this may mean a loss of income. Some divorced couples may also consider keeping (or purchasing) life insurance on the person who has the primary responsibility for raising the children. If he or she dies, costly childcare will need to be arranged.
Therefore, the person receiving alimony or child support should own and pay for the life insurance policy on his or her former partner to ensure that the premiums are paid and the policy is in effect.
Keep in mind that if you and your ex are considering purchasing life insurance to provide financial protection for your children but money is tight, you may want to consider purchasing term coverage rather than whole life. Term is generally cheaper, and it is designed to provide protection for a specific period of time—for example, until the children reach the age of 21.
Health insurance
Unless both parties have their own health insurance and there are no children, health insurance should be clearly agreed upon in the divorce decree. Federal law states that spouses and their dependent children who are currently insured by a health plan are eligible for Consolidated Omnibus Budget Reconciliation (COBRA) coverage for 18 months. The divorce decree should state how this is going to be paid, and it should also include a legally binding plan to make health insurance available after that time.
About 115,000 women lose their private health insurance every year in the wake of divorce, according to a study out of the University of Michigan, and many don’t regain coverage quickly. Even women who have health insurance through their own employers may find themselves unable to afford their coverage after divorce. The study found that 11 percent of women who had employer-based health insurance became uninsured, due in part to the fact that they were unable to pay for their share of the plan after the divorce.
The Affordable Care Act (ACA) may ease the financial burden of health insurance for divorced people who get dropped from an ex’s plans. The last day to enroll in or change a marketplace plan for 2015 was February 15, 2015, but you may still be eligible for a special enrollment period that runs from March 15 to April 30, 2015. Click here for more details.
Disability insurance
Roughly one in four of today’s 20 year-olds will become disabled before they retire. Currently, more than 50 percent of disabled Americans are in their working years, between ages 18 and 64.
If you become disabled, it can threaten financial support upon which your children and former partner depend. Disability insurance should be addressed in the divorce decree, and careful attention should be paid to how disability insurance should be funded.
As with a life insurance policy, the person who is receiving financial support from his or her former partner should own the policy and pay the premiums to make sure that the policy remains in force and that the beneficiaries are not changed. The funds for the insurance policy should be included in the amount of financial support the spouse and children receive.
Long-term care insurance
Long-term care insurance covers the cost of assistance to those who are unable to perform their normal daily activities. People dealing with chronic health conditions or physical disabilities, such as multiple sclerosis, Parkinson’s disease, or Alzheimer’s disease, may need long-term care. In fact, at least 70 percent of people over the age of 65 will need some type of long-term care in their lifetime, according to the Genworth 2014 Cost of Care Survey. Couples going through a divorce need to make sure to take into account the cost of long-term care insurance when assessing insurance needs and allocating assets.
Divorce is never easy, but there are things you can do to alleviate some of the stress. Before you and your partner meet with your insurance or financial advisor, make a list of your assets and liabilities so you know what needs to be considered in the divorce. This list should include real estate and personal property; checking, savings, and investment accounts; retirement and pension plans; and life insurance. On the liability side, there are the mortgage, car, and school loans, as well as home equity and credit card balances. You may also want to develop—and stick to—a budget to help you adjust to your new lower income.
Loretta Worters is vice president with the Insurance Information Institute, a non-profit organization whose mission is to improve public understanding of insurance—what it is and how it works. Follow her on Twitter: @LWorters.
