What Happens to Term Insurance Policy After Divorce in India?

Divorce involves a course of action in several social and legal aspects, making it a relatively stressful event. Even among such issues, term life insurance policies may need consideration during a separation. Although these policies typically remain in force after a divorce, these may require changes in light of the latter.

Let's explore what happens to term insurance following marital dissolution by highlighting the need to update beneficiary information and details to achieve the policy's objective in a new life phase.

1. Ownership of the Policy

2. Beneficiary Designations

Another important issue that should be resolved after the divorce is the choice of beneficiary. The policyholder often changes this decision since the ex-spouse can occasionally be listed as the beneficiary.

Significant changes that can be made on or before maturity include reviewing and updating nominees because undeserving beneficiaries may receive the payout upon the policyholder's death.

3. Premium Payment Responsibility

1. Continuing the Policy

In many cases, the best option is to keep the term insurance policy because the process is relatively simple. This way, the policyholder can keep the coverage they have negotiated for, and possibly at competitive premiums. To continue the policy effectively:

• Change contingent owners or beneficiaries for assets to your present choice.
• Ensure that the premiums are paid regularly as stated in the divorce agreement or any other agreement.
• Check the coverage amount to guarantee that it remains sufficient and changes regarding new responsibilities or dependents.

2. Cancelling or Surrendering the Policy

In some cases, cancelling the policy might be the preferred choice, especially if:

• The policy is no longer needed due to changed circumstances.
• The premiums are no longer manageable, especially after divorce.
• The current stage of the individual’s life calls for a new policy.

When cancelling, learn about any charges or fines imposed in cases of early cancellation of the contract. Consider the effect on insurability in the future if you only buy a new policy later. Also, you must ensure everybody affected by the policy is informed that the policy has been cancelled.

3. Transferring Ownership

Transferring ownership of the policy to an ex-spouse or another party might be necessary or beneficial in certain situations:

• If the policy is to attain the objective of alimony or child support payments.
• When the insured party is no longer in the best position to control the policy.
• Distribution of assets in light of the divorce.

When transferring ownership, consult with an insurance company representative regarding instructions on transfer. Ensure all legal contracts, agreements, or formal instruments are duly signed, sealed, and recorded. Also, change all the contact details and payment information with the insurance provider.

Case Study: Term Insurance Decision of the Guptas After Divorce

After 12 years of marriage, Akash and Preeti Gupta decided to part ways. They shared a joint financial history, including a ₹1 crore term life insurance policy under Akash's name, with Preeti and their two children listed as beneficiaries.

Post-divorce Options for Them:

• Continuing the Policy: Akash could retain the policy and alter the beneficiary to their kids.
• Cancelling: They could cancel the policy, and each would obtain a different policy.
• Transferring Ownership: It may be given to Preeti as part of the dissolution of marriage with Akash to continue paying the policy premiums under child support payment.

Decision: They decided to continue the policy by having Akash as the owner. They changed the beneficiaries to include their children, for whom Preeti was to act as their legal guardians until they were adults. This meant that the children were protected post-separation while making the arrangements concerning money more manageable.

Children as Beneficiaries

Naming children as direct beneficiaries of a term insurance policy requires careful thought and planning:

• Age Restrictions: There are some general policy guidelines that any insurance firm will not agree to pay death benefits to minors.
• Financial Management: Consider whether your children can handle a large sum of money properly when they reach the legally defined age of majority.
• Equitable Distribution: The benefit can be divided equally among several children, but you can also choose to base the division on each child’s needs or social status.
• Periodic Review: Since children have needs that progress with development, assessing and modifying beneficiary designations is vital as beneficiaries age.

Appointing a Trust or Guardian for Payouts

To address the challenges of naming minor children as beneficiaries, parents often opt for more structured approaches:

• Establishing a Trust: Set up a life insurance trust that will hold and disburse the policy monies on behalf of the children. State whether any distribution should be made and, if so, how and when. This may mean that someone retains control of the funds beyond their majority. Appoint a trustee for the trust, thus ensuring that only a well-known and respected person will control the fund and make decisions for the benefit of the children.
• Appointing a Guardian: It is also advisable to appoint an estate guardian to manage the insurance funds until the children grow up. Choose somebody responsible for their earnings and has a proper outlook on money and the upbringing of children. Make sure you explain your wishes to the person nominated to act as your guardian, perhaps in a letter of instruction included with your will.
• UTMA/UGMA Accounts: Another useful idea is to select UTMA or UGMA accounts for inclusion in the list of beneficiaries. These accounts enable an appointed guardian to manage the money on behalf of the child until the age determined by state legislation.

Post-Divorce Financial Planning

Post-divorce financial planning involves:

• Reassessing Income and Expenses: Analyse the type of financial changes that might have occurred, including changes in income, changes in living expenses, alimony, or child support, which may be expected.
• Updating Financial Goals: Revise the concept of short-term and long-term goals, ranging from emergency funds to retirement and children's education expenses.
• Reviewing Insurance Coverage: Check whether your present term insurance coverage suits your new roles and objectives. Consider factors like outstanding debts, income requirements for future income replacement, child support or alimony payments, etc.
• Adjusting Policy Details: If necessary, change the term insurance policy. The coverage may be changed, for example, by increasing or decreasing it according to the results of new calculations.

Seeking Professional Advice

Dealing with financial planning and insurance matters after divorce comes with many challenges. Seeking professional guidance can provide valuable insights and ensure comprehensive coverage:

• Financial Advisor: It is always advisable to meet with a financial planner to review your objectives and determine how term insurance will fit into your new plans.
• Insurance Agent: Consult with an insurance expert, read your current policy, and compare it to the new conditions more suitable for you.
• Legal Counsel: If needed, seek legal advice to confirm that any insurance modifications meet the divorce settlement terms and corresponding legal requirements.