How To Handle Beneficiaries During Divorce

Major life events may prompt you to make necessary updates on your estate plans and life insurance.

And, a divorce is no exception.

In the process of dividing assets, ensuring your children adjust smoothly, and getting your life together as a single parent or grandparent, making necessary changes on your estate plan and life insurance beneficiary may be overlooked.

However, handling your life insurance is an integral part of the divorce, especially if your partner is the primary beneficiary. Failure to update the life insurance policies may result in an ex-spouse remaining as the primary beneficiary or long lost relatives as the contingent beneficiary getting your assets . And the last thing you may want is to let your soon-to-be ex-spouse receive more than you have agreed to. In many cases, if young children are involved, there may be a valid reason to have coverage in place to provide for those children, but this could be done using a trustee who looks after the funds for the children until they are of age.

How do you handle beneficiaries during a divorce?

In most cases, married people list their spouses as primary beneficiaries on insurance, group benefit plans and even registered accounts. Meaning, in the event of death, their spouses end up with the resources needed to simplify the estate process and get the capital in the hands of who needs it most. 

Here is why;

Life insurance protects those close to you from financial devastation in the event of your death. And for a married person, no one is closer to you than your spouse. In the case of a divorce, there is a probability you may not want your ex-wife or husband to benefit from your wealth. So, to avoid this, you have to update your life insurance beneficiary. Often this step can be dealt with well in advance of the divorce proceedings and at the point of a separation agreement if one is put in place.

However… life insurance policies can have a revocable or irrevocable beneficiary designation. This could create a wrinkle in plans.

Can I change the revocable Beneficiary?

The policy owner can change a revocable beneficiary without consent from the beneficiary. So, if you separate with your partner, you can remove your spouse’s name and select another primary beneficiary such as your children, a close relative, a church or a charitable organization. Most life insurance policies in Canada are revocable beneficiary designations.

What is an irrevocable beneficiary?

An irrevocable beneficiary requires the consent of the designated beneficiary for any changes to happen. Therefore, if your partner was the primary beneficiary, you will need your ex-spouse to sign off in the event of a divorce to remove them from your Life Insurance policy. 

You have the freedom to change your beneficiary designation multiple times. The best part is, there is no cost required when changing your beneficiary. So, after divorce, you can contact your insurance advisor or send a letter to an insurance company specifying the changes you would like to make.

In case your chosen beneficiary is still a minor, you can select a trustee. A trustee can be a relative or a close friend you trust. If death occurs before the beneficiary is of age, your trustee will be required to look after the proceeds on their behalf (Tip – let trustees know you have elected them as a trustee, so they don’t get surprised).

After the change, be sure to inform the newly selected beneficiary or trustee of the changes made and the policy summary. In case of death, they will have details of the policy and who to contact.

Finally,

Life insurance agreements can be hard to navigate, especially if the policy has an irrevocable designated beneficiary. However, consulting an experienced professional can help you make informed choices on how to handle beneficiaries in the event of divorce.