Visit us at divorceandyourmoney.com for the #1 divorce resources in the USA and get personalized help. Learn about coaching services here. One of the questions that comes up often that is a source of confusion, is how does life insurance work during the divorce process and actually afterwards. I want to take some time and clarify how it could work and how it might apply to you. I'm going to start with how it works during the divorce process. Then also talk about the role after the divorce process because it's not always intuitive and it's usually not what people think. The first element is, during divorce the question that people ask, is life insurance something that's split or how does that work? Does it have value? Generally speaking, it depends on what kind of life insurance policy you have. Most life insurance policies, not all, but most life insurance policies are what's called term life insurance, which is a policy that exists for a certain term or certain number of years.
You buy this life insurance policy. It may be for 20 years and you pay a monthly amount and if you were to pass away during that time, then that life insurance policy pays out. But after that time frame passes, that money goes away and you don't get it back and that life insurance policy doesn't have any value. Conversely, some life insurance policies are called whole life policies which are just that. There are many complications and variations within them, but they cover your whole life. They don't have a term, they don't have an ending date. What's important about whole life policies is that oftentimes whole life policies build up what's called a cash value. That cash value is the case or the place where when you build up that policy, there is some value to it that you can cash out or borrow against or sell the policy for, that has value associated with it.
The real goal is, is to figure out, well what type of life insurance policy do you have and does it have any value. Now, term policies generally speaking, have zero value to them. If you're thinking about your financial information or you're splitting up your assets or whatever, oftentimes you'll see the life insurance policy and you'll put the value. You'll need to list that you have the life insurance policy, but the value on it might be zero. So there's nothing to discuss or at least to split when it comes to the policy itself. That's most common with term policies and, just as an aside, is the reason that term policies are so common, is because they don't have a value at the end, they tend to be cheaper. Term policies tend to be less expensive for people then the whole life policies and just more common and simpler.
I just see them a lot more often and I think they're more popular than the whole life policies. It's just something you should be aware of but nothing to worry about there. Just want to make sure that you understand why it doesn't have any value in why it's so common. Then also if you have a whole life policy. So the question I'll ask is if you have a whole life policy and you're trying to split things during divorce, my question to you will be, well, what is that policy worth? What's the cash value on that policy? If there is a cash value to the policy, then that is an asset that needs to be split and needs to be discussed. Usually you don't physically split a life insurance policy, but the person who owns it, that goes on their side of the ledger and then the person who doesn't own that life insurance policy gets their share of the value from it, usually from some other asset.
Rarely do you actually take the cash out from the life insurance policy. It is an option and there's lots of intricacies and complications to it, but we're not gonna go through it cause it's just so minute and varies so often. But it is an asset, no different than a retirement account or a bank account or a valuable or collectible or whatever is. It has value and therefore it is something whose value you need to determine who's going to keep and what someone else is going to get in exchange for that life insurance policy. Now, the other side of the equation is after divorce, how does life insurance work? It's something that's interesting because oftentimes I'll hear from you, you'll say like, "Hey, my spouse is requiring me to get a life insurance policy. Does that make sense? Why am I getting a life insurance policy that my spouse owns or my spouse is the beneficiary of or whatever?".
Some cases, I'll tell you also like, "Hey, you should require that your spouse gets a life insurance policy", or I should say soon to be ex-spouse, "gets a life insurance policy because it can be effective for you." Here is the scenario. Why does that matter? Well, what matters is that if there are ongoing support payments, and they could be alimony/spousal support or they could be child support payments. If they're ongoing payments, then you...
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