Life Insurance - How to Value and How to Divide

Life insurance is a financial product designed to provide a lump-sum payment, known as a death benefit, to designated beneficiaries upon the insured individual's death. There are various types of life insurance policies and different ways to value and address them during divorce.

Three Common Types of Life Insurance

Term Life Insurance provides coverage for a specified period, typically 10, 20, or 30 years, with a death benefit paid if the insured individual dies during the term. This type of life insurance often has a low monthly or annual premium amount and it builds up no inherent value.  If you ever stop paying the premium or the term ends, the life insurance policy is terminated. Term life insurance typically has no value in a property division analysis.  It may be used to insure a support agreement in case something happens to you (see module on Life Insurance to Secure Support).

Whole Life Insurance provides permanent coverage with a guaranteed death benefit payable regardless of when the insured individual dies, as long as premiums are paid. There may be a cash value that is built up in the policy over time and can be cashed out if needed.

Universal Life Insurance is like a whole life policy but it combines a death benefit with an investment component, allowing policyholders to build cash value over time. These accounts have more flexibility in premiums paid, the death benefit, and investment options.

Considerations in Divorce

When valuing life insurance in divorce, there are a number of considerations. While the death benefit and premiums are typically considered more in cash flow analysis, the cash value should be included in the property division analysis. The cash value is the accumulated savings component of permanent life insurance policies, which may be accessible through loans or withdrawals. This cash value is typically identified in the balance sheet and treated similar to a cash or investment asset.  

There are various ways a life insurance policy may be addressed in the divorce.  One or both spouses may choose to retain existing life insurance policies, either individually or as part of a divorce settlement, to maintain financial security for themselves or their dependents.  Life insurance policies can sometimes be transferred from one spouse to another, ensuring that beneficiaries and coverage remain intact post-divorce. In some occasions, it may make sense to sell a life insurance policies for the cash surrender value or transferring ownership to a third party in exchange for a lump-sum payment, providing immediate liquidity and financial flexibility. Or parties may choose to cancel a policy and liquidate any cash value.

Unlike some financial assets, life insurance is typically well-documented.  Comprehensive documentation of the policies, including policy statements, beneficiary designations, and premium payment records, is typically provided by the provider allowing you to accurately assess their value and options for division in divorce proceedings.

Life insurance policies may have tax implications, including income tax on withdrawals or loans from cash value policies and estate tax on policy proceeds in certain circumstances. Consulting with tax professionals can help mitigate tax liabilities and optimize financial planning strategies.

In conclusion, life insurance is a valuable financial tool with diverse applications in divorce proceedings. By understanding the types, purposes, valuation considerations, legal implications, and emotional factors associated with life insurance, couples can make informed decisions that protect their financial interests and promote financial security for themselves and their dependents post-divorce.