Insurance Considerations When Divorcing
Often, one of the most overlooked tasks during divorce is to redefine your insurance needs and secure the appropriate coverage. Understandably, there are many other priorities to be addressed, but identifying your insurance needs is helpful BEFORE signing the marital settlement agreement for negotiation purposes as well as for better insurance premiums in some instances.
Healthcare
One of the key insurance changes will be healthcare for any spouse who has been covered under another healthcare plan. If employed, it is easy to consider converting to your own employer’s plan instead of your spouse’s employer. However, the coverage should be compared in tandem with the costs to continue under the previous plan through COBRA. COBRA coverage is generally quite expensive.
When divorcing, any spouse has the option to continue the current plan through COBRA, albeit at a higher premium since you are now responsible for paying not only the employee premium but also that of the company. This makes COBRA highly expensive but that expense should be weighed against the benefits received, providers who might not be accessible under a different coverage, ability to afford the expense, and the fact that COBRA for divorcees extends for 36 months (12-18 months longer than the typical extension provided under COBRA). Every individual situation is unique and each of these factors may be weighted differently for each circumstance.
If you choose COBRA, be sure to submit immediately after receiving the final decree or bifurcation. A bifurcation is an official date of divorce even though the other issues may not yet be settled. The of divorce may be much later, but in the eyes of the law and IRS, you are officially divorced if you bifurcate the marriage from the other issues of the divorce. Even though a bifurcation order may state that current healthcare coverage must be maintained, the company does not necessarily need to adhere to the court order since the spouse is officially divorced with a bifurcation. The clock starts ticking on the window of opportunity to apply for COBRA at the time of the bifurcation—not at the time of the final decree of divorce.
Property and Casualty Insurance
You may no longer own a home nor vehicles that have been awarded to the other spouse. It is important to have an agreement between you and your spouse about reassigning the insurance pertaining to the vehicles. Take them off of the marital policy once the vehicles have been awarded to the other spouse or both spouses can purchase new insurance. Your attorney will be able to confirm when it is legally allowed to remove a car or driver from a policy. Be sure to act as soon as possible once you receive the green light to do so.
You may also want to start comparison shopping for insurance, when the multi-car discount or homeowner insurance is no longer applicable. Because you may have been accustomed to discounts applied for multiple coverages (auto and home), this may no longer apply when the home is sold or bought out by the other spouse or you only have one auto. This is a catalyst for you to shop around for affordable coverage.
Umbrella Insurance
Often, when there is a high net worth household, the couple has umbrella insurance which provides additional coverage to protect your assets beyond that provided by homeowner’s insurance and auto insurance. There are limits to liability insurance for each of the auto and home policies. Note that you must own a home or own or lease an auto to qualify for umbrella insurance.
If autos are removed from the policy, there will be a reduction in the umbrella insurance premium. Again, consult with your attorney to confirm when you may remove a party or auto from the umbrella coverage. However, beware that if any of the covered assets are still titled in your name, you may still be liable if there is a mishap. Be sure to retitle assets pursuant to any stipulations or agreements once they are awarded to the other spouse when your divorce is finalized or when this is agreed upon by the parties during the divorce.
Long-term Care Insurance
A frequently overlooked insurance is the long-term care coverage. This is especially important in grey divorce when the prime window (lower cost) to secure coverage is when you are between 50-60 years old.
Contrary to popular belief, Medicare does not cover you for assisted living or nursing home care. Long-term care assistance is typically needed by 70% of seniors and for an average of 3 years.
Monthly costs for long-term care currently average upwards of $10,000 (2023) and could easily drain savings and inheritance for many families especially since healthcare inflation runs approximately 8% annually.
Because there may not be another person to provide the caregiver responsibilities when you might need it in the future, it is important to discern how you will cover this need and whether insurance or self-insurance a feasibility.
Disability Insurance
If you are now the sole provider post-divorce, it is essential that you consider long-term disability insurance. Disability policies in general serve to replace your income to some threshold (typically 60% or 70%).
There is a far greater chance for the need for disability insurance than life insurance especially at younger ages (your thirties through sixties) due to illness, treatments, accidents, or other causes. In fact, the probability of a need for disability insurance if far greater than the likelihood of collecting on life insurance during working years.
Without your income, how will you be able to meet your expenses? Long-term (i.e., greater than six months) disability insurance is also recommended to be obtained on the supporting spouse if you are receiving either child or spousal support to ensure continuance of payments if that person is disabled for any length of time.
Disability could be due to medical treatments, an accident, chronic illness or short-term illness of any nature. It is highly recommended for anyone of any age to ensure that you can still maintain your expenses when the income is temporarily or permanently on pause.
Individual policies are those that are purchased separately, but the coverage is not entirely additive to that which your employer may provide that you may elect to pay for as a group premium deduction from your paycheck. Long-term Individual policies coordinate with employer policies which are typically for short-term disabilities. The meet longer term needs that you might have. In coordinating with the short-term policy, they may supplement up to a certain threshold higher than what your employer might pay out.
Disability insurance on the supporting spouse should be considered as part of any child or spousal support received because the group disability plans typically cover only short-term disability. Even when there is an option to purchase long-term disability, there are thresholds as to the amount of income it will supplant as mentioned earlier. And, bonuses, stock grants, restricted stock options are not considered. Only a percentage of the base pay is factored in for disability payouts. From that amount that will be covered, for example, 60 percent, taxes will be assessed so the actual take home from an employer plan is much lower than the support amount. Because the remaining net amount will be significantly less and both child and spousal support may be reduced.
However, as a supported spouse or parent receiving child support, you may take out an individual policy on the payor, pay the premiums, and better prepare for any potential loss of support due to a long-term disability even if it not permanent. The cost is usually reasonable and requires the cooperation of the supporting spouse to meet the qualifications of the disability insurer.
Life Insurance
While the probability of receiving life insurance benefits from an ex-spouse may be low, it is often recommended by family law attorneys when there is a permanent support agreement in place. It offers some sense of security and is typically not costly if term insurance is purchased. Term insurance is highly recommended over whole life policy because the length of the term may be better aligned with the timing of the support order or agreement and because premiums are much lower than whole life.
The marital settlement agreement should include verbiage that requires the insured to cooperate for being qualified (and this applies to disability insurance as well). In gray divorce, securing life insurance may not be as cost-effective or even possible due to the qualification parameters. You will be rewarded for comparing highly rated companies and their plans to secure one meets your particular situation.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
