Couples in the midst of divorce have many things to consider, such as determining child custody and divvying up property. But insurance is an area that many divorcing couples overlook, experts say, even though it can have a long-lasting effect on their lives.
“Insurance is one of the things that is often negotiated as part of a settlement in a divorce case,” says Linda Lea Viken,president of the American Academy of Matrimonial Lawyers.
Figuring out which policies must be changed and how to change them can take time, so divorcing couples should start the conversation early. Angie Kirk of Baltimore was surprised by the amount of insurance talk between her and her ex-husband during their divorce in 2008.
“All the policies were in my name, so a lot of things had to change,” Kirk says. “We did it over time because so much stuff was intertwined and we were trying to help each other out.”
Not only should couples hash out their plans with a family law attorney or mediator who’s helping them with the divorce, but the Insurance Information Institute recommends that they alert their insurance carriers about their impending divorce as well. Here’s a look at what divorcing couples should consider for each type of policy.
It might not seem like a big deal to switch from one auto insurance policy to separate ones, but the move can have far-reaching consequences.
For one thing, policyholders who have several cars insured with one company and have added another type of policy like homeowner's insurance usually qualify for a discount. So when the policies are separated, one person ends up with higher rates. Likewise, “there are different rates for the spouse who has the kids on his or her policy, or the one who has the better driving record,” Viken says.
Couples should discuss the repercussions to ensure that each person’s needs are taken into account.
In some cases, one spouse will take the other off the auto insurance policy before a divorce is complete. That’s not a problem, as long as the other spouse already has taken out his or her own policy. If the couple don’t coordinate the changeover, they run the risk of one person being uninsured for a period of time.
Experts also advise making sure the policies are separated by the time the divorce becomes final. “If you get divorced January 1 and have a car accident January 2, is the insurer going to pay out?” says Steve McBride, a certified divorce financial analyst and mediator in Greenwood Village, Colo.
Couples who plan to maintain a joint auto policy until the divorce is final should make sure their insurer still will cover them after a legal separation, McBride warns. Some splitting couples have run into problems with claims, so “get it in writing that if you’re legally separated, the spouse will still be covered,” McBride says.
Not only can a couple’s life insurance needs be affected by divorce, but many couples use life insurance as a tool to make sure other obligations of the divorce are met. “When there’s spousal support and child support, it’s usually a good idea to have life insurance in place to cover the outstanding liability if one person were to die,” McBride says.
Many couples address this need with a "decreasing term" life insurance policy, in which the death benefit gets smaller over time. That way, if one spouse is responsible for four years of child support, the policy decreases each year to cover only the outstanding liability.
Disability insurance is another policy that can be purchased to ensure that an ex-spouse is able to make his or her child support payments in the event of illness or injury, McBride says.
When a couple has no children and no spousal support is in play, the task of handling life insurance is much simpler. “Couples will likely want to change the beneficiary unless they don’t mind the ex-spouse getting a windfall if something were to happen,” says De’Lante Rawls, managing principal of National Insurance Consulting Group, an insurance advisory firm in Washington, D.C.
Also, in cases where the life insurance policy has a cash value attached, “that’s a marital asset, so that has to be considered in the division of property,” Viken says.
Perhaps the easiest type of insurance to deal with is home insurance, since it’s tied to ownership of the property and typically paid along with the mortgage. If a couple refinances a home in one person's name, the insurance becomes the responsibility of the homeowner.
Once a couple moves to separate residences, each person should make sure his or her belongings are safe. That may mean a spouse who moves into an apartment buys a renter’s insurance policy.
If both ex-spouses live in separate places but retain joint ownership of a home until it can be sold or refinanced, then they must determine who will make the mortgage and insurance payments during that period. A written agreement that outlines the financial obligations that each partner will assume will ease that process.
Perhaps the most difficult type of insurance to hash out is health insurance, since it can determine an ex-spouse’s ability to obtain affordable medical care. Children cannot be kicked off a parent’s health insurance plan because of divorce, thanks to a 1993 amendment to the Employee Retirement Income Security Act (ERISA). “Typically, health insurance for the child is assigned to one of the parents, with the other parent paying a proportionate share of it,” Viken says.
If both ex-spouses have health insurance through an employer, they might compare the policies and have the children assigned to the better one.
However, the biggest challenge typically occurs when one spouse does not have an employer that offers health insurance and, as a result of the divorce, must find an insurer to cover him or her.
One tool that can be used in this situation is the federal Consolidated Omnibus Reconciliation Act, or COBRA. Under the law, group plans offered by employers with at least 20 workers must allow the ex-spouse of a covered employee to continue health coverage. However, McBride says, "the employer doesn’t have to subsidize any of the cost like they do for the employee."
Deadlines are important with COBRA. For example, an ex-spouse would have 60 days to elect to receive coverage through COBRA and another 45 days to pay the first premium. So couples must be diligent about making sure such deadlines are met so both the ex-husband and ex-wife can end up with insurance.
In some cases, insurers will stop the coverage of a spouse if the couple is legally separated, so again, McBride urges couples to get it in writing from the insurer that the spouse still will be covered during the separation.