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What happens to insurance policies in a divorce?

by | Jan 20, 2022 | Asset Division

When people in North Carolina are moving forward with divorce, they are no longer in lockstep with each other as they once were. In fact, even if they have children, they will be heading in opposite directions when it comes to property division. Divorce has a way of clouding details that once felt mundane, but now must appear in an inventory of assets.

While insurance policies may seem like an afterthought at this stage, the courts consider them to be marital assets. Forgetting to make adjustments during the divorce can have profound health and financial repercussions later on. Getting focused on all that matters is the first step toward creating a secure future after the divorce is over.

What is marital property?

North Carolina is an equitable distribution state, meaning that the law requires a fair, but not necessarily equal, division of marital assets and debt. Marital property is everything that the two people acquired during the marriage, such as finances, real property like the family home, personal property such as artwork, jewelry or a car, investments, and yes, insurance policies.

During the discussions surrounding the property settlement or separation agreement, it is important to bring up designated beneficiaries as well as whose name the policies are under. This can affect not only property or life insurance, but also health or disability insurance coverages.

Is it possible to maintain existing policies?

Some federal laws allow spouses to maintain their health coverages with existing policies. It may be wise, though, to refrain from retaliatory actions against your ex, as the courts may not look kindly on such behavior. Couples with long-term care policies or those that are part of a retirement portfolio should discuss the pros and cons of continuation versus division.

Some policies such as life and disability insurance have accrued cash values, which means that a cash surrender of these will most likely spell termination of the coverage. As the price of life insurance usually goes up as the policyholder gets older and their health deteriorates, it may not be wise or advantageous to try to get a new policy. An alternative may be to lower the coverage of the existing policy or arrange a cash payment by one spouse of its cash value in the agreement.

An important detail not to overlook is to update or transfer beneficiary designations, purchase additional coverage, or add policies if necessary. Forgetting to change a beneficiary designation could bring on an interpleader lawsuit is the beneficiary passes, which will put control of its allocation in the hands of the court.