Life Insurance Beneficiary Rights After a Divorce: Can a Divorce Decree Override a Named Beneficiary?
When divorce is a certainty, one of the first things to do is to review the beneficiaries on life insurance policies, pension and retirement accounts, and other brokerage accounts. Most married couples make their spouses the beneficiaries of these types of accounts. Unless the beneficiary is changed, that is who will receive the money upon the account owner’s death, regardless of a divorce.
In many divorces, savings accounts and retirement accounts are divided as part of the separation agreement. But secondary contract accounts such as life insurance policies are often overlooked when individuals are considering the division of assets on their own. If secondary contracts are not addressed during a divorce, an ex-spouse may receive an unexpected payment that should have gone to a new spouse or child.
A divorce lawyer from Charles R. Ullman & Associates will ask you about secondary contracts and other accounts you hold in preparation for the asset division process. Re-aligning these accounts to reflect your new marital status is one of the numerous steps we’ll help you take to protect yourself financially in a divorce.
To learn more, contact us today. We serve clients throughout Raleigh and Wake County.
Updating Life Insurance for a Divorce
Adults maintain life insurance to provide financial protection for their loved ones. Most married people with life insurance list their spouse as the primary beneficiary. At first thought, most people who have divorced would not want their ex-spouse to remain the beneficiary and receive the life insurance payout upon their death. But that changes when a couple has underage children together.
When reviewing life insurance policies in preparation for a separation and divorce, the policyholder needs to consider:
- Ensuring that any children involved are financially protected
- Protecting alimony and child support income
- Making necessary beneficiary changes
- Accounting for the cash value in whole or universal life policies.
If your ex-spouse and underage children will still depend on you for financial support following your divorce, it is probably appropriate to keep your spouse as the beneficiary on your life insurance.
If you are ordered to pay spousal support and/or child support in your divorce settlement, the judge may require you to maintain life insurance to protect these payments. Once your children reach the age of majority, you may file a motion to have the divorce agreement amended.
If there are no children involved, and you are not ordered to maintain insurance as part of spousal support, you can change the beneficiary on your policy by contacting the insurance company or your employer’s HR department for policies provided through an employer.
Some life insurance policies are established with irrevocable beneficiaries, which cannot be changed by the policyholder alone. Unless an ex-spouse agrees to changes in the policy, as an irrevocable beneficiary, he or she would have the right to a payout upon your death even after a divorce.
Counting Life Insurance Among Marital Assets
Because many life insurance policies, particularly whole life and universal life policies, accumulate cash value, these policies may be counted as marital assets to be divided according to your separation agreement. Typically, any assets acquired after you are married are considered marital assets and available for equitable division between you and your spouse.
Unless you had your life insurance policy before you were married, it is likely to be considered marital property. If you have had it for several years of marriage and it has a high cash value, you can expect your spouse to demand their share of it as part of your divorce settlement.
Often, cashing out of such a policy is the easiest and best resolution. The cash derived would be split, and you would have the opportunity to re-invest your share of the proceeds.
Dividing Retirement Accounts in a Divorce
Retirement funds accumulated during a marriage are typically treated as marital property. If a 401(k) plan or a similar fund was in place before you married, the plan administrator should have records that allow you to segregate early earnings from the amount to be divided and shared with your spouse.
Another factor to consider is whether a retirement account is fully vested. A partially vested account is worth less than its face value. There may be contingencies that affect the value of a defined-benefit plan, such as a pension. Pensions are based on the employee’s time with the company and salary in the final year before retirement. There are also tax ramifications of dividing retirement benefits.
If you cannot avoid dividing retirement accounts, such as by trading another asset of similar value in your separation agreement, the court will ultimately decide its value and what an equitable split should be.
As your divorce attorneys, the attorneys at Charles Ullman & Associates would:
- Work with financial experts to establish the value of your retirement accounts
- Ensure that taxes are minimized if you receive distributions from retirement accounts
- obtain the necessary “qualified domestic relations order” (QDRO) If you are ordered to divide an account with your ex-spouse. A QDRO is a court order that allows the plan administrator to distribute funds from employer-sponsored 401(k) or 403(b) plans or a pension plan to an alternate payee. In most cases, a QDRO allows funds in a retirement plan to be separated and withdrawn without penalty.
IRAs are not protected like pensions or a 401(k) or 403(b) and do not require a QDRO. IRAs are split, and if you are not yet age 59½, you are likely to be subject to income tax and an early withdrawal penalty.
Because your retirement fund account would continue to exist, you would still need to change the beneficiary on the account. Unless you take action, your ex-spouse would stand to inherit the rest of your retirement benefits upon your death.
Other Secondary Contract Accounts in a Divorce
For investment accounts you own jointly with your spouse, you can usually provide a letter to the financial institution and ask to have the joint account closed and new, separate accounts opened in each person’s name. The letter would detail how the joint account would be divided. If necessary, we could help you with paperwork to move your account to a different financial institution, as well.
If you must sell the assets of an investment account, we would help you negotiate the timing of the sale to avoid selling during a market decline.
Who’ll Decide How Your Secondary Contract Assets Are Divided?
There are numerous points to be considered when dividing retirement and investment accounts and similar assets. Unfortunately, with money at stake, there’s also plenty of opportunity for contention.
Our family law attorneys are skilled negotiators who will work to help you and your spouse come to an equitable agreement about dividing your accounts. We might suggest that you and your spouse would benefit from working with a professional mediator or another neutral third party to develop your separation agreement.
A separation agreement spells out the terms of your divorce. After living apart for a year, you can ask the court to grant your divorce, upon which your settlement agreement becomes a binding legal order.
If you cannot reach a proposed agreement to present to the court, the family law judge will decide the division of assets. It’s possible that neither of you will like what the judge decides.
If you have to have a judge determine how your marital assets will be divided, you must file a claim for equitable distribution in your home county, such as in Wake County District Court. This requests that a judge decide any contested issues surrounding the identification, classification, valuation, or distribution of assets shared during your marriage. You may arrange for witnesses, such as appraisers or financial advisors, to testify.
If you and your spouse come to an agreement, you must ask the court for a consent judgment. In this scenario, the judge reviews your settlement agreement. If he or she agrees it is fair, the judge simply signs off on it.
Let Our Asset Division Attorneys Help with Secondary Contracts
If you are facing the end of a marriage, there are many issues to consider. Let an experienced Raleigh family law attorney from Charles R. Ullman & Associates review your situation and help you pursue the outcome that is most important to you. We want what is best for you and your family and will work hard to achieve your objectives while protecting you financially.
There are many potential financial consequences that arise when a divorcing couple begins to divide financial accounts and retirement accounts. Each option can raise additional issues. It is important to work with knowledgeable divorce attorneys who have experience in the division of financial assets.
Charles R. Ullman & Associates offers more than 20 years of hands-on experience helping clients successfully resolve family law matters, including legal separation, divorce, equitable division of all marital assets, and related domestic issues. Charles Ullman is certified by the North Carolina Bar as a Specialist in Family Law. Contact us today at (855) 928-0531 to schedule a confidential review of what you want out of your divorce.