Divorce and Insurance
Which of the following professionals is least likely to be an impartial member of your post-divorce, financial planning team?
- Insurance Agent
- Former mother-in-law
A major life-change like separation or divorce often brings about a period of personal and financial reassessment. Putting together a team of professionals to help you through the planning stages is crucial. Insurance protection is an important part of any financial plan and there are a number of insurance issues to focus on when separation and divorce are being considered.
Insurance policies protect assets and are an asset themselves. In all cases, except life insurance, the person who owns the policy receives the financial benefit provided by it. The person who owns the life insurance policy determines its beneficiaries.
If you depended on your spouse's insurance benefits before the divorce, you will need to replace them. Don't assume that what was appropriate before is still adequate or available to you. Check all of your coverage needs, and those of your children, as soon as possible.
At the Benson Thomson Agency, Inc. we can help you make sure you, your children, your assets, and belongings are protected in the ways you want. The following questions can help you begin to organize your insurance overview:
What insurance policies were in place during the marriage and what were they protecting?
Which of these policies do you still need?
What health plan will cover you?
Which spouse's health plan will cover your children?
What insurance is in place to fund alimony and/or child support if the responsible spouse is disabled or dies?
How much homeowners or renters insurance do you need?
Should you upgrade your auto insurance to include special services like: towing, rental reimbursement and emergency roadside assistance?
Health insurance–sometimes called medical insurance–pays you (the insured), or your health provider, benefits when you become ill or injured as defined under the terms of the contract. There are several different types of medical insurance available:
- Employer-provided medical insurance–this coverage is usually the most cost effective for you, if you qualify, because your employer pays a portion of the premium. See your human resources department for details.
- Individual medical insurance policies–these policies can be purchased directly through an agent or from an insurance company to cover you and your family.
- Professional and/or fraternal organizations–groups or organizations sometimes sponsor group medical plans for their members. These plans can be more cost-effective than an individual medical insurance policy.
- Medicare–this federal program provides mandatory medical benefits to all U.S. citizens 65 or older. The program has two parts: hospital insurance and supplemental medical benefits.
If you were covered under your spouse's employer-provided medical insurance, you will most likely be ineligible to continue this coverage after you are legally separated or divorced (laws vary by state and/or policy).
You may be able to temporarily continue under your ex-spouse's plan for a short period of time under the federal law entitled COBRA. Check to see if COBRA is available, because all companies are not required to provide this benefit. If it is available you will most likely have to pay the entire premium, since the employer (and your ex-spouse) will no longer be required to subsidize it for you (or your children).
COBRA ensures that you will be offered the right to continue in the health insurance plan for a specified period of time. Even though you will have to pay the premium, the group rates and benefits are usually better than those available with individual plans.
Whether or not you choose to continue on your ex-spouse's plan it is important to have medical coverage in place quickly and without interruption. A break in insurance coverage can create a situation where an ongoing or newly developed medical problem can be categorized as pre-existing. Coverage for a pre-existing condition can be refused under a new policy, or can be considered grounds for cancellation of a policy. Laws vary by state and/or policy. See a Trusted Choice® insurance agent for information and assistance on this issue.
Who's on first: The Birthday Rule
It is not unusual for children of divorced parents to be listed as dependents on the health plans of both parents. To prevent claim payment problems, insurers will designate one parent's plan as “primary” and the other's as “secondary”. Generally the primary plan pays the cost of the claims first; the secondary plan pays any remaining costs.
The birthday rule is the way in which insurers determine which plan will be considered primary. Under this rule, the health plan of the parent whose birthday comes first in the calendar year is designated as the primary plan. Age does not matter since they are not looking at the year of the parent's birth.
The birthday rule is not an insurance law. It is a widely accepted practice, but there are exceptions. Read your policy or check with us at the Benson Thomson Agency to find out what procedures your insurer follows.
Home is where the insurance is
You will need to purchase homeowners/renters insurance if you are planning to:
- Rent a home
- Remain in your pre-divorce home
- Buy a new home with a mortgage (lenders require insurance)
Homeowners/renters insurance typically protects your belongings (contents) against losses from a wide variety of potential perils, such as: fire, smoke, lightning, theft, vandalism, or malicious mischief, explosion, riot or civil commotion, damage from aircraft, vehicles, and falling objects, electrical surge, windstorm, hail, and plumbing-related water damage.
Liability covers your responsibility for legal defense costs, medical payments and damage to property (other than your own) if you are sued by people who are injured on, or by, your property.
Most homeowners policies have strict limits on certain valuable items, and for certain types of potential perils. Pay special attention to the details of your policy in those areas.
There are two types of policies designed to cover your contents: actual cash value and replacement cost. If you purchased an “actual cash value” policy, you will be paid the cost to replace items after depreciation. A “replacement cost” policy takes into consideration what it would cost to replace the item at today's prices, and your claims settlement will reflect that additional cost.
Wheels of fortune
State laws mandate vehicle insurance. At minimum, you must maintain liability insurance to cover the costs in the event that you cause an injury to another person or damage to their vehicle. You can be held liable for the injured person's expenses including medical and lost wages.
If your pre-divorce insurance was packaged with your spouse's (and your home) you may find that you are ineligible for the same insurance you had. Check your policy to find out who you must notify of your change in circumstances and the time frame for doing so.
Survey says: protect your income
Insurance industry surveys show that if you are between the ages of 25 and 55 you are twice as likely to become disabled than to die. Protecting your paycheck when you are a single-income household is of vital importance. That is what long-term disability insurance (LTD) is designed to do.
Most LTD policies are written to replace between 60 and 70 percent of your income if you are disabled. Usually there is a waiting period of 90 days minimum before an LTD policy begins paying benefits. Before you purchase LTD, you may want to think about how much income you will need for living expenses so that you can project the benefit level you will need from the policy.
Many employers provide group LTD policies. These group policies may not provide the total projected income needed if you are disabled and you may want to supplement your group policy with an individual one.
Do you know where your kids are (covered)?
As a parent developing a new life plan, you need to take your children's financial and physical welfare into consideration. Be sure you know who will be responsible for the children's insurance needs in the following areas:
- New/young drivers
When you get divorced, it's prudent to review the beneficiary designated on the following:
- Life insurance
- Retirement accounts
- Bank accounts
- Investment accounts
- And any other assets
Planning a new kind of life
Although it's hard to think about life insurance when you are in the midst of reorganizing your life, it's thoughtful planning to consider the future welfare of your dependents.
If you have suddenly become the primary support of your dependents you may want to consider buying (or increasing existing) life insurance policies to help protect their future economic stability.
You may also want to consider having your divorce settlement stipulate additional life insurance coverage for your ex-spouse if you rely on him/her for child support or alimony.