No one likes to think about a marriage breaking down but it happens. When a couple is separated or divorced the assets are split as part of your separation/divorce agreement. Life insurance is a valuable asset that needs to be considered during this process
First we look at the beneficiary designation on your life insurance. There are two types of beneficiaries, revocable and irrevocable. A revocable beneficiary can be changed by the policy owner. An irrevocable beneficiary cannot be changed without the consent of the irrevocable beneficiary. As a matter of clarity, at the time of a separation/divorce, the life insurance beneficiary designations are not changed as part of your separation/divorce agreement. Therefore, if life insurance adjustments are part of your separation/divorce agreement, it would be prudent to deal with this directly with your insurance advisor.
Second, we look at the value of a life insurance policy. Some life insurance policies (such as whole or universal life) have a value associated with them and are considered part of the family financial assets. Typically these policies may be valued at the cash surrender value. However, if there has been a change in the insureds health, the value may be higher. We recommend using a valuator to determine the fair market value of your insurance.
Third, we look the ownership of your life insurance. There are times when a policy on one spouse is owned by the other spouse or by his/her corporation. In this case the policy owner and the insured are different and the policy ownership may need to be changed as part of your agreement. There are rules in the income tax act that allow a policy to be transferred to a spouse as a spousal rollover so long as this is done while you are still spouses or as part of the settlement of property rights. In some cases when we have two lives on one policy (such as a joint last to die plan), things get more complicated and the outcome depends on whether or not the insurer will allow the policy to be split into two separate policies and there may be tax consequences.
Bottom line. If you are getting separated or divorced, make sure the life insurance is part of the discussion and consult your insurance advisor.
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Elliott Levine, MBA, CFP
Levine Financial Group in Toronto
We Save Physicians Money on their Insurance
416-222-1311 I firstname.lastname@example.org