Clearly, there are a lot of things to consider when a couple decides to divorce. In addition to figuring out child custody issues, there is spousal and child support to consider, name changes, and the closing and opening of bank accounts, just to name a few things.
That means sometimes it's easy to let a few things slip through the cracks, and figuring out what to do with a life insurance policy might be one of them. Generally, the spouse who is primarily supporting the children is required to maintain life insurance coverage for the financial future of the children. However, there are a lot of mistakes people make regarding life insurance after a divorce. Here are some that can be avoided.
• Changing a beneficiary when it's not allowed. Some people might attempt to add a new spouse or family member to a policy, but often times that is prohibited by a divorce agreement. A beneficiary can avoid this complication by becoming the owner of the policy.
• Underinsurance. It's always good to keep in mind that when the policy holder dies, the amount of coverage should be able to cover finances for the children, and sometimes for the ex-spouse. If the amount does not cover paying for education and the mortgage, it's probably not enough.
• Allowing a policy to lapse. Policies can be cancelled if the policy holder does not make timely premium payments. That's why it may be a good idea for the beneficiary to make sure they are notified if premiums are not paid.
Source: Live Insurance News, "Life insurance and divorce - what to do with term policy?" Chris Taylor, July 23, 2012