Getting a divorce changes your insurance needs
Divorce is a stressful ordeal. If you divorced recently — or anticipate a divorce in the coming months — you should review your insurance to make sure it meets your new obligations and financial situation.
Alimony, child support and mortgage payments, as well as your children's medical care and college tuition, are among the factors that must be finalized in a divorce settlement. Divorce could also have serious implications for your life and health insurance policies.
As part of a divorce settlement, the spouse who will be paying alimony and child support might want to consider buying a life insurance policy. That's because upon the death of that person, the ex-spouse would lose the alimony and child support that had been agreed on, cutting off a key financial pipeline.
|Top five insurance mistakes made when getting a divorce|
1. Not discussing who will pay for health insurance for the children. If both of you have health insurance, you'll need to decide which plan is better for the children's health needs.
2. Getting dropped from your spouse's health insurance plan. If you're insured under a spouse's plan through work, beware that your spouse could drop your health insurance without your knowledge before a divorce.
3. Not realizing you may be eligible for COBRA. Divorce is a "qualifying event" for COBRA coverage, so if you're dropped from your spouse's group health insurance, you could be eligible to buy that plan yourself for up to 36 months.
4. Not having life insurance for the benefit of your children and ex-spouse. If your ex-spouse is still dependent on your income, especially if you have children together, you'll want to have life insurance to provide for them when you're gone.
5. Not updating beneficiaries on life insurance policies. If you have an ex-spouse named as the beneficiary on your life insurance policy, you'll need to update your beneficiary (unless that ex-spouse is still dependent on your income for themselves or for children).
The spouse who receives alimony or child support should beware: The former spouse at first could agree to buy the insurance then change the beneficiary or stop paying premiums and lapse the policy. Norse Blazzard, an insurance law attorney with Blazzard & Hasenauer, P.C. in Fort Lauderdale, Fla., suggests including a stipulation in the divorce agreement requiring the ex-spouse to pay premiums to keep the insurance current. Blazzard says the divorce agreement should also prevent the ex-spouse from changing the beneficiary. If the ex-spouse violates the agreement, he or she could be found in contempt of court and subject to fines or other penalties.
Michele Sacks Lowenstein, a San Diego divorce attorney, recommends that the ex-spouse making alimony or child support payments should verify every year that the insurance policy is still valid and the ex-spouse is still listed as the beneficiary.
If you are wondering what type of insurance you should buy to protect your alimony or child support obligations, most experts suggest you buy term life insurance instead of a permanent life insurance policy that accumulates cash value.
"In divorce cases, you're more likely concerned with insurance protection rather than building cash value," says Blazzard.
Term life insurance premiums are less expensive than permanent life insurance premiums; that is an important consideration, particularly when you are going through an expensive life change such as a divorce.
If your ex-spouse has remarried and has two household incomes, or he or she makes enough money to raise the children comfortably without additional financial support, you may decide to change your beneficiary. Many people name their children as the beneficiaries of life insurance, but a minor cannot receive a life insurance benefit until age 18. If your children are under 18, you should set up a trust in which a trustee oversees the funds until the children reach a certain age. Otherwise, the insurance company will hold the benefit until the children are 18.
Lowenstein says that if there isn't a life insurance policy in place and the children are still minors, the surviving parent could collect the former spouse's social security.
It's important to know that divorcing couples may have access to continued health insurance benefits through COBRA, a federal law that guarantees that upon divorce you can buy 36 months of health insurance coverage through your former spouse's group health plan. When an employee notifies his or her employer of the divorce, the employer (if subject to COBRA law) will send notices to the family members on the policy, informing them of their right to COBRA coverage. For more details, read know your COBRA rights.
Since COBRA benefits are meant to be short-term, consider securing a more permanent health insurance policy.
"If you are healthy, you may want to consider a private plan rather than taking COBRA," says Lowenstein. "If you took the COBRA coverage and became ill during the three-year period, you might find that you are uninsurable at the end of three years, when COBRA expires. A private plan, rather than a group plan under COBRA, would help to continue coverage and might be worth the extra expense."
|COBRA can guarantee that the ex-spouse can buy 36 months of health insurance coverage through a former spouse's group health plan.|
If both parties have group coverage available through their workplaces, the spouse who is dropped from the original health coverage can immediately pick up group coverage through his or her employer without waiting for an open enrollment period.
Either you or your ex-spouse's health insurance can cover your children. Keep in mind that most HMOs use regional networks of doctors, and if you move out of state and your child is under your ex-spouses policy, coverage may be limited to emergency care.
There's no reason for you both to out your children on both health insurance policies.
"It's not like the carrier is going to pay them twice," says Lowenstein. "That should be coordinated with the person handling the divorce proceedings. The parents should go with the best coverage possible, the spouses should decide who covers the children and go to their HR people and put them on the better policy."
If the divorce isn't amicable, the courts will send all of the necessary information regarding health care (medical records, insurance identification numbers) to the spouse who is awarded custody
Other questions of custody and insurance include:
- Changes in address or names (women may revert to their maiden names or remarry and change last names).
- Informing an employer or health plan administrator when and if a spouse or dependents should be removed from your employer's group health plan.
Lowenstein says, in some cases, when both parties are responsible for the uncovered medical expenses of the children, a number of problems can arise. There might be one parent with the health insurance policy who is putting in claims but keeping the reimbursement or a portion of it and not sharing it with the other parent to pay for the child's medical expenses.
"It has been known to happen, so it's best that the parent who has custody has a means of contacting the other spouse's insurance to determine that they are getting the full reimbursement for their child's medical expenses," says Lowenstein.
There are also ways to make sure insurance premiums are paid after a divorce.
"It's called a qualified medical child support court order, or QMSCO," explains Lowenstein. "It's used to enforce an order for a health plan participant to provide child-support health benefits. It also allows the non-employed spouse to communicate with the former spouse's insurance company and payments for reimbursement for medical expenses are made directly to the spouse who has custody."
Auto and home insurance
If both you and your spouse's names are on your car insurance policy, contact your auto insurer and ask for separate policies. Have your spouse removed from your car insurance policy if he or she will no longer be driving your car.
Brian Wilson, an attorney with Nicodemo & Wilson in Canton, Ohio, emphasizes the importance of naming a son or daughter as the "named insured" or "resident relative" on a car insurance policy.
"You have to make sure the divorce attorney ensures that minor children are covered under one or both of the parents' policies," he says.
If a teen alternately resides with each parent under a custody or visitation arrangement, it is not uncommon for the teen to have access to both parents' vehicles at both homes. You'll want to make this clear to the insurance companies in order to have proper coverage and pricing.
If you are getting the house — typically your most valuable asset — make sure the home insurance policy is in your name. You also want to review your personal-property coverage limits. Since ownership of many of your joint assets will be divided between you and your spouse, you may be able to reduce your personal-property coverage and save money.