Divorce Changes Everything: The Life Insurance Edition

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Separation and divorce present couples with a compelling and often complex set of reasons to re-evaluate. Some are emotional, some are rational, and some are largely financial. And some are all three. Estate planning falls into that last category. It’s difficult for many of us to discuss, let alone plan for, the day we won’t be around anymore. But plan we must, particularly if we have minor children who depend on us for financial survival. 

Life Insurance Is A Must For Parents

Many financial advisors put life insurance at the top of the list of conservative investments to include in a long-term financial plan. Life insurance can be separated into two basic types: permanent life insurance and term life insurance.

While it doesn’t wow you with big, flashy gains in the short-term, permanent life insurance instills discipline in policyholders. It helps them save consistently as it increases moderately in value. Permanent life insurance is typically more expensive than term. Term life insurance is often the first type new parents purchase. It doesn’t increase in value as time goes on but it’s generally inexpensive to purchase while we’re young. More importantly, it protects the people who depend on us financially should the worst happen. The best life insurance policy for you and your family will depend on numerous factors, including your life stage, who depends on you for financial support, and your investment goals.

How Does Divorce Change Our Life Insurance Needs?

Both permanent and term life insurance pay a death benefit. And both require policyholders to name a beneficiary—the person (or people) who receive the proceeds of the death benefit. Many married people name their spouses as beneficiaries, regardless of whether they have children. But when we divorce, it’s natural for our thinking to change around policy beneficiaries. Divorce has a way of eroding trust—or perhaps vice versa. In any case, if you named your ex as beneficiary of your life insurance policy, you should probably be thinking about naming a new one. That’s how you can insure only your children benefit from its proceeds.

Can’t I Just Name My Kids?

You can. Naming a beneficiary on your policy is critically important. The proceeds of a policy with no named beneficiary will wind up in that no-man’s-land called probate. Depending on the size of an estate, probate can take quite a bit of time. Six to nine months is average. But it can take longer, particularly if a decedent doesn’t have a legal will. That’s a great argument for making sure you have a will, incidentally. It’s best to have yours professionally prepared. Ambiguity in a will can also trigger the probate process.

Having a will and naming a policy beneficiary alone doesn’t ensure that your children will immediately have access to the funds they need to be well-cared for, however. Kids can’t legally own large amounts of money—whether it comes from the proceeds of a life insurance policy or inherited property—until they reach the age of majority. The law recognizes that minors don’t have the wisdom or maturity to manage finances. Most parents feel that way, too, of course. That’s when naming your children’s guardian and putting a conservator in charge of your estate comes in.

The Difference Between Guardians And Conservators

Many parents name a guardian in their wills—the person their children will live with when they’re deceased. Few decisions we make in life are so consequential. If you’re divorced, your ex-spouse might be your kids’ guardian by default, particularly if you’ve been raising your kids under shared custody arrangements. Guardians must be approved by the courts. Judges usually accept a deceased parent’s decision about guardianship. But they can also reject your choice if you name someone they deem incapable of raising your children well.

Guardians aren’t the same as conservators. Here’s a simple way to think about it: guardians make decisions about people and conservators make decisions about money. In some cases, a child’s guardian and the conservator assigned to oversee how his or her assets are the same person. But there are certainly reasons why you might want to name two different people. For example, you might respect your sister’s values and delight in her nurturing spirit. You know she’d give your kids a solid moral foundation and a loving home. But she’s never been good at managing money and you fear she’s not equipped to make major financial decisions wisely. So you decide to name one person to manage your kids and another to manage their money. Good thinking.

Divorce is another reason you might choose to name both a guardian and a conservator. Let’s take a look at some of the reasons why.

Trust: A Critical Factor In Estate Planning

What are they eating for lunch? What are they doing with their smartphones? Why are their grades slipping? Loving parents worry about their kids every day and every way. Knowing someone will devote the same cautious attention to our kids once we’re gone is why we name guardians and conservators.

Sadly, lack of trust is often the reason couples separate in the first place and the divorce process can further erode the confidence we have in our exes to “do the right thing.” Particularly when it comes to money. Disparate attitudes toward financial matters and even a history of irresponsible spending on part of one spouse is another issue that often underly the end of a marriage. So even if you feel confident that your ex will raise your children right, you may not trust him or her to spend your child’s assets wisely. If your ex has moved on to another relationship and has parenting and financial responsibilities for someone else’s kids, that can also raise questions. Assigning a conservator in addition to a guardian can mitigate your concerns in either case. Under a guardian/conservator arrangement, a guardian has the day-to-day responsibility of caring for your children and will recommend how your kids’ assets should be spent. But a conservator oversees and has ultimate responsibility for financial decisions made on their behalf. Some parents choose conservators specifically for their financial expertise and that’s not a bad strategy.

Just Do It

Parents have to make tough calls all the time. But thinking about one’s own death is especially difficult. Many parents put off making estate planning decisions out of discomfort or inexperience. Don’t be one of them. Procrastinating can have severe consequences for your children, including compounding the grief they’re already experiencing. An estate planning attorney can walk you through some of the soul-searching you’ll need to do. So can a spiritual advisor. And once they reach an age where they can understand the importance of the decisions you’ll be making, don’t forget to talk to your kids. Ultimately, it’s their safety and happiness that counts. They deserve to be a part of the conversation.

Author Bio: Susan Doktor is a journalist, business strategist, and the mother of twins. She writes about a wide range of subjects, including personal finance, legal matters, and family life. Follow her on Twitter @branddoktor.

Photo by Jordan Whitt on Unsplash


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