By Pascale Hansen

Divorce can be a complex and emotionally charged process, especially for business owners who must navigate not only personal decisions but also financial implications. Among the many considerations in a divorce settlement, life insurance often plays a critical role. Understanding how life insurance fits into divorce agreements is essential for business owners to protect their financial interests and ensure the well-being of their loved ones.

The Importance of Life Insurance in Divorce Settlements

Life insurance serves as a financial safety net, providing benefits to beneficiaries upon the policyholder's death. In divorce settlements, it can take on various roles:

Spousal Support Assurance: Often, the divorce settlement may include provisions for spousal support or alimony. Life insurance can guarantee these payments continue, even if the paying spouse dies unexpectedly.

Child Support Protection: For business owners with children, ensuring child support continues is paramount. Life insurance policies can ensure that a death benefit is available to cover child expenses.

Asset Protection for Business: In some cases, the division of business assets can be contentious. Life insurance can provide a way to manage these assets, particularly when business valuation or future earnings potential is involved.

Types of Life Insurance in Divorce Settlements

There are two main types of life insurance policies commonly used in divorce settlements:

Term Life Insurance: This policy provides coverage for a specified term and is often more affordable. It’s commonly used for short-term obligations like child support or spousal alimony over a defined period.

Permanent Life Insurance: This includes whole life and universal life policies. They provide coverage for the policyholder's entire life and can build cash value over time. Permanent policies can be beneficial in long-term arrangements.

Key Considerations for Business Owners

Policy Ownership: In divorce agreements, the question of policy ownership is crucial. The spouse who will benefit from the policy should ideally be the policy's owner. This can help avoid complications if the policyholder attempts to alter or cancel the policy later.

Beneficiary Designation: Ensure that the divorce settlement clearly outlines who the beneficiaries will be. At the time of applying for a life insurance policy you will be asked whether beneficiary designations are to be made irrevocable or revocable. Changing beneficiaries after the divorce can lead to disputes and complications, particularly if the policyholder remarries.

Policy Financing: Business owners should assess who will finance the policy premiums. It might be stipulated in the settlement that one party pays for the life insurance policy to protect obligations, and failure to do so can lead to lapses.

Tax Implications: The tax treatment of life insurance policies needs to be fully understood not just by the policyholder but by her or his tax advisor and/or accountant.

Business Ownership Structure: It is also important to account for how life insurance will affect the ownership structure of the business. The death benefit can affect the cash flow of a business, especially if an owner passes away unexpectedly.

Incorporating appropriate life insurance policies into divorce settlements is not just about compliance with legal obligations. It’s also about sound financial planning that protects both business interests and personal responsibilities. Thus, it’s advisable for business owners to consult with financial advisors and legal professionals when addressing life insurance in their divorce agreements to ensure lasting peace of mind.

If you’re going through a divorce in Canada or the US and have questions about life insurance options, we’d be happy to help.

Pascale Hansen is the Founder, CEO, and Financial Strategist at Zada.

#Divorce #LifeInsurance #FinancialPlanning #DivorceSettlement