Insurance and Divorce
Going through a divorce is one of the biggest stresses in life. It becomes even more so when there are children involved. So many changes that need to be done and so much to go through, it’s no wonder insurance needs get forgotten. When people separate, they often remain connected — usually through a co-parenting relationship or because of ongoing child or spousal support obligations. In Canada, 41% of all divorces have children involved.
Here is a real case that ended up going to the Supreme Court for a decision:
A couple were going through a divorce — part of the agreement was for the husband to continue his life insurance and his ex wife would be the beneficiary — it was agreed that she would continue the premium payments for the policy, the value of which was $509 a year.
Two years later, the ex-husband moves in with a new partner and she becomes his common-law spouse. He decides to change the beneficiary to reflect his new partner, and does so without telling his ex-wife. Ten years later, he died, leaving his common-law partner $500,000. Needless to say, his ex-wife was angry as she had been paying the premiums all these years just in case something happened and she needed the money for their children.
She brought the case up to the insurance company and they sided with the common-law spouse. This escalated to the courts and they decided that, although the insurance company was right in paying the common-law spouse, the divorce agreement stated the insurance money would go to the ex-wife.
We learned several things about insurance — the first being that the divorce agreement superseded the contract with the insurance company. Where the decree held the agreement, it was not up to the insured, in this case, the ex-husband, to change the beneficiary. She should have insisted she be made irrevocable as this would have guaranteed she be the beneficiary. He would not have been allowed to change her name without her permission.
The ex-husband could also have left the insurance money to his children, in trust. This means choosing someone to represent the children’s best interest until they are of legal age to receive the money.
Another thing we learned is that insurance was used in the divorce as a means for the ex-husband to continue support should he pass — this support takes in to account alimony and child support.
Divorce doesn’t change the beneficiary designation unless the divorce decree makes a stipulation on it to change.
If you are including an insurance policy as part of a divorce agreement, please remember the following:
Irrevocable beneficiary is the safest way to ensure you receive the money from your ex-spouse’s policy. You can’t change the designation without the beneficiary’s agreement.
If you are setting up a trust account for your children, make sure it is with a neutral party whose sole responsibility will be to ensure the children inherit the money from the policy.
Having a life insurance policy as part of a divorce agreement is a great way to ensure you are taken care of in the event of a death. If you are looking for help creating a policy, please reach out.
