What happens to life insurance after a divorce?

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Q. What happens to life insurance after a divorce? If the primary beneficiary was a spouse when the policy was issued, but has since divorced, who gets the payout if the beneficiary was never changed? I find it hard to believe the insurance company can say it doesn’t have to pay because of a divorce.
— Confused

A. It’s not up to the insurance company.

The payout from a life insurance policy is based on the paperwork.

Let’s take a step back.

It’s very common for an individual to have an obligation to maintain a life insurance policy providing for benefits to be paid to an ex-spouse, said a certified matrimonial attorney with Shane and White in Edison.

Specifically, if an individual has an alimony obligation, that individual will most likely have a court-ordered obligation to maintain life insurance benefits so the alimony-receiver would get the full payment in the event of the payor’s premature death, White said.

“For example, if at the time of the divorce, a husband was required to pay alimony to his wife in the sum of $20,000 a year for a term of 10 years, that husband would likely be required to maintain life insurance providing for payments to be made to his ex-wife in the sum of $200,000, assuring that the ex-wife would receive 100% of the payments she would have received in alimony in the event the ex-husband died the very next day,” White said.

It’s also common, White said, for a spouse to be permitted to decrease the amount of life insurance benefits for each year that he or she satisfies the alimony obligation in full.

In this example, the spouse could decrease the benefits by $20,000 a year so that at the conclusion of 10 years there would be no further obligation to maintain life insurance benefits, he said.

Further, in cases where an ex-spouse is ordered by the court to maintain life insurance benefits and the ex-spouse fails to maintain the benefits as ordered, the beneficiary will be able to make a claim against the estate of the ex-spouse to collect what would have been received had the ex maintained the court-ordered life insurance benefits.

To your specific question, a life insurance policy is simply a contract between an individual and a company. The insurance company agrees to pay benefits to the named beneficiary as long as the premiums are paid.

“Individuals are always free to name anyone he/she may want to name as a beneficiary, whether a spouse, an ex-spouse, child, other relative, good friend or even a stranger,” White said. “It is not up to the insurance company to determine whether a named beneficiary is worthy, but for the insurance company to honor its contractual obligation to pay benefits to the beneficiary named by the insured.”

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This story was originally published on Dec. 9, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.