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How are life insurance policies handled in a divorce?

When you go through a divorce, you’re bound to have plenty of questions about the process and how it will affect different things. Child custody, support and property division are among the common issues you’ll have to deal with. Each issue carries with it different rules which will determine how its handled, and this is no less true when it comes to life insurance policies.

Marital property versus separate property

When a family law court begins a divorce proceeding, one of the first things it will do is divide all of the couple’s assets into one of two categories – marital and separate property. Life insurance policies are no different in this sense. If the court determines the policy has been wholly owned by one spouse, it will likely classify it as separate property, to be retained by that spouse. But if it is classified as marital property, it will be divided between the spouses according to the concept of equitable distribution.

Equitable distribution of a life insurance policy applies to both the proceeds of the policy and the obligation to pay future premiums. It does not necessarily mean the distribution will be equal – rather, the court will seek to apportion the proceeds and obligations fairly, based upon the particular circumstances of the divorce.

Spouse as life insurance beneficiary

Since many people name their spouse as the beneficiary on their life insurance policy, it’s important to note what happens as a result of the divorce. Texas law automatically revokes the spouse’s status as a beneficiary when the divorce is finalized. There are, however, exceptions to this law. If the policy designated the spouse as beneficiary to hold the proceeds in trust, for the benefit of children, it will not be disturbed. Or, if the holder of the policy wants their former spouse to retain their status as a beneficiary, an order can be included in the divorce decree stating such. Otherwise, the former spouse must be redesignated as the beneficiary after the final divorce order has been signed.

 

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