Life Insurance

Life Insurance in Divorce Matters

Life insurance is a financial tool that many married couples rely on to protect their families. During marriage, it is common for spouses to take out life insurance policies naming each other as beneficiaries, ensuring financial support in the event of an unexpected death. However, when a couple divorces, the role and ownership of these life insurance policies can become much more complicated.

In most divorces, spouses may choose to cancel the policy, change beneficiaries to children or other family members, or adjust coverage to reflect their new circumstances. But in some cases—particularly those involving long-term financial obligations—the life insurance policy may be considered marital property and may need to be continued under the terms of the property settlement or divorce judgment.

For example, a life insurance policy may be required to secure:

Long-term spousal support
Child support obligations
Future college or medical expenses for children
Lump-sum financial agreements
Property settlements tied to structured payments

If a policy was purchased with marital funds, or if marital income was used to pay premiums over many years, the policy may accumulate significant value. Whole life and universal life policies, in particular, can build cash value that becomes a marital asset subject to equitable distribution—regardless of whose name is on the policy.

Because most couples commingle their income during marriage, the value of a life insurance policy often increases as a joint investment. Over time, this appreciation may be partially or entirely marital property. Determining the character of the policy—separate or marital—and identifying how much of its cash value is divisible can be critical in achieving a fair outcome.

Is It Always a Good Idea to Liquidate a Life Insurance Policy for Divorce?

Liquidating an insurance policy is not always the best or most financially sound option. While selling or cashing in the policy may provide immediate funds for settlement, doing so can result in tax consequences, penalties, or the loss of a valuable financial asset.

Before making a decision, several considerations should be evaluated:

1. Age and Health

If a spouse is older or has significant health concerns, maintaining the policy may offer better long-term benefits and may be significantly harder or more expensive to replace.

2. Support Obligations

Courts sometimes require life insurance to remain in place to secure long-term obligations, such as child support, maintenance, or education expenses.

3. Future Benefit Planning

Life insurance may remain a strategic financial tool even after the divorce, providing stability for children or other dependents.

4. Cash Value vs. Long-Term Value

For whole life policies with substantial cash value, spouses must weigh the benefits of cashing out now versus allowing the value to grow for future distribution or security.

5. Tax Implications

Liquidation may trigger tax liabilities that reduce the net value of the policy. A careful tax and financial analysis is essential.

Every situation is unique, and the decision to liquidate, divide, or maintain a life insurance policy should be part of a larger strategic plan created with the help of an experienced family law attorney.

Why Skilled Representation Matters

Couples with high net worth often face numerous complex issues during divorce. Life insurance is just one of the many financial considerations that must be handled with skill, precision, and a full understanding of the law. Choosing a lawyer who can navigate these complexities is critical.

At Stange Law Firm, PC, we understand the financial implications of life insurance policies in the context of divorce. Our attorneys work closely with financial experts, insurance professionals, and tax advisors when necessary to ensure that all aspects of your policy—cash value, beneficiaries, premium obligations, and long-term benefits—are analyzed properly.

We help clients protect their rights and future security by addressing a broad range of complex property issues, including: