This post was originally found on PhillyBurbs, where Loretta Hutchinson maintains a Divorce and Money Matters blog.
A woman named Laura B. recently approached me to help her understand the financial aspects of a proposed divorce contract. Together with her soon to be ex-spouse, she had accumulated a diverse list of assets. And, as is very common in divorce proceedings, there were investments in this divorce contract that she didn’t understand, one of which was a Fixed Index Universal Life Insurance Policy. Should she be seeking this in the division of property and how would this insurance policy affect her financial future?
There are a variety of cash-value life insurance options: whole life, variable life, and universal life. Cash value life insurance is a type of policy that can be used as a tax sheltered investment as the interest and earnings on the contract may not be subject to income taxes. The cash value can be used to borrow from or as a way to pay premiums due on the policy. Upon the policy holder’s death, the policy will pay out the death benefit to the stated beneficiaries.
Analyzing the individual life insurance policy contract and the underlying guarantees are an important part of the financial asset and marital distribution review process.
There are important questions that need to be asked:
- What is the original purpose of the life insurance and does this need still exist? What are the premiums and are they still affordable?
- Are there any loans against the cash value?
- When were they taken and how will this affect the policy’s future?
- If the policy is no longer needed for its intended purpose does a 1035 exchange into another policy make sense?
It is also important to note the beneficiaries of the life insurance policy, which party will pay the premiums post-divorce and who has access to the cash value.
Any cash value life insurance policy can be easily misunderstood and should be reviewed in depth before deciding whether to accept or reject in a marital distribution. A trusted insurance agent and CDFA should be included in that discussion to educate the parties involved so mistakes can be avoided.
If you still have questions and don’t know where to start, contact Loretta today: 215-860-6056 or Loretta@FinancialDivorcePlan.com.