How does a Life Insurance Policy Work in a Divorce?

Life’s journey is as unpredictable as life itself. Needless to say, it is financially prudent to mitigate risks and losses caused due to loss of life. However, life is a roller coaster ride by itself and even the best of relationships can turn sour with time. Marriage is no exception.

Marriages may be made in heaven, but divorces are the hellish reality of today’s upwardly mobile, aspirational professionals. Whereas you must do everything possible to stay afloat in the sacred institution of marriage, it is wiser to know what should be done in case a divorce becomes inevitable. How does divorce affect assets, life insurance policy in particular?

Types of Life Insurance Plans to Secure Your Financial Future

Life insurance is not limited to just one type of policy. There are multiple plans available to cater to different financial goals and life stages.

Different life insurance plans are designed with specific objectives and focus areas. Some of them are listed below:

• Term Life Insurance Plan- These plans are pure life covers carrying a fixed amount as a “sum assured” that is payable on the unfortunate demise of the insured. Term plans are affordable, offer protection and can also be used to create an inheritance. Although the emotional loss can never be made up for, the loss of family income can be backed by life insurance. The iSelect Smart360 Term Plan by Canara HSBC Life Insurance is an example of a comprehensive term life insurance policy.
• Endowment Plan- An endowment plan is designed as a safe investment strategy with an add-on life cover. At the time of maturity, endowment plans pay back the guaranteed amount + applicable bonuses + guaranteed annual additions, if any. Such policies also extend life cover even after the maturity value is disbursed.
• Pension or Annuity Plans- Pension plans give you payouts in the form of annuities post-retirement. Life cover is also extended as a double benefit.
• Annuity Plan Strategy- ULIPs are a lot like endowment plans but the investment component here can be exposed to equities for wealth creation. Needless to say, this too comes with a life cover.

What to do with your Life Insurance Policy after a Divorce?

Post-divorce, your life insurance needs may change. Here's how to re-evaluate and update your policy to reflect your new circumstances.

Update Beneficiaries

The purpose of life insurance is to create financial protection for your family in case fate snatches you from them. It is devastating if you happen to be the only or major breadwinner in the family. Most people nominate their spouses as beneficiaries so that the family gets money to live on. But what if you go through a divorce?

Most life insurance policies are flexible and allow changing the nomination or beneficiary named in the policy. The insurance company office or even your insurance advisor can help you update the name in the records.

Open an EIA (Electronic Insurance Account)

EIA stands for e-Insurance Account or 'Electronic Insurance Account' which stores the insurance policy documents of policyholders in an electronic format. This e-Insurance Account provides access to the insurance portfolio on the Internet.

Advantages of an EIA:

• No physical policy documents
• Manage your life insurance policies in one account
• Update contact details in all your policies in one go
• Opening EIA is free

IRDAI Approved Insurance Repositories

Insurance Regulatory and Development Authority (IRDA) has granted the following four entities to act as 'Insurance Repositories' that are authorized to open EIA:

• NSDL Database Management Limited
• Central Insurance Repository Limited
• Karvy Insurance Repository Limited
• CAMS Repository Services Limited

These repositories help you keep all your insurance records streamlined and up-to-date, even after a divorce.

What to do About Joint Life Insurance?

Married couples often sign up for joint life insurance policies. These policies pay out once at the demise of the first spouse and then a second time upon the demise of the second. A joint life insurance policy is generally more affordable for married couples. But they can be rigid when life doesn’t go as anticipated. Joint life insurance generally cannot be divided. However, a few exceptions are listed below:

• If the policy has an investment component, you can surrender the policy and avail the fund value. This can be divided between the spouses in line with the divorce agreement.
• Either spouse can assign the policy to the other. Both partners should be willing to this arrangement and the spouse taking over should be ready to pay the future premiums themselves. Thus, the policy premiums and benefits will belong to only the assignee. 
• If it is a pure term plan, simply cancelling the policy is an option if either spouse does not want the other to get the sum assured in case of demise.

How to Treat Child Insurance Plans?

Child insurance policies are designed to help secure your child's financial future. They ensure that significant milestones like college or education are not compromised, regardless of what the future holds. In a divorce, it is essential to determine who will maintain and continue to pay for these policies.

It is preferable to talk about it openly and make a decision together as parents. The rights and responsibilities should rest with the parent with whom the child resides most of the time, as they have to handle the daily needs and upbringing of the child. However, if the non-resident parent can afford the plan without any issues, then they should continue handling it; however, it should be documented in a legally binding agreement.

In both instances, it must be remembered that the child is still the owner of the policy and the proceeds. It is theirs in the long term and must never be a source of contention. There must always be one of the parents still alive as a guardian to the policy so that the money may be utilised by the child.

It also goes without saying that the insurance company must be informed of the arrangements for custody and all records, contact information, and nomination information brought up to date. This will facilitate ease of claims and policy benefits processing when the need arises, without any administrative or legal hold-up in the future.

Impact of Divorce on ULIP Plans

ULIP policies are a mix of insurance and investment. If the couple divorces, and they purchased the ULIP jointly or from a joint account, then they should come to a mutual understanding of who gets to retain the policy. The surviving spouse should ensure that they continue to pay the premiums so that the insurance does not lapse. If the ULIP has a high value, then it can be sold and divided equally based on agreement and documentation during divorce.

Final Thoughts

In conclusion, divorce is a challenging phase that impacts not just emotional wellbeing but also financial security and insurance decisions. Reviewing and updating your life insurance policies, joint covers, and child plans is crucial to ensure that your loved ones remain protected without disruptions. Canara HSBC Life Insurance offers a wide range of plans that can be customised to suit your evolving life needs, ensuring that even during life’s uncertainties, your financial security remains strong and uninterrupted.