When couples get divorced, it can seem like there are a million different things to think about. Putting aside the emotional impact of a separation, spouses must consider the potential financial effect of their ending marriage. While there are many potential ways in which a divorce can affect a spouse’s financial well-being, life insurance is one area that requires considerable care and attention. How does a divorce impact life insurance? What are some special considerations that spouses must consider when approaching this topic?

Superior Court in Pennsylvania Rules that Life Insurance Proceeds are Not Marital Assets

In 2021, it was reported that the Superior Court of Pennsylvania had made an important ruling regarding life insurance in divorces. In Goodwin v. Goodwin, 2020 Pa. Super. 284, the court was faced with a somewhat unique situation. A spouse had received life insurance proceeds during the course of the marriage, and it was unclear whether or not these funds would be considered “marital assets.” If they were considered as such, they would, of course, be subject to equitable distribution. 

The court found that these funds were not marital assets. This was an important decision, as the court had not previously faced this issue directly, despite the divorce code laying out regulations pertaining to this matter as early as 1980. 

Life Insurance Proceeds are Generally Considered Inheritance

In equitable distribution states like Pennsylvania, almost all of the assets accumulated by spouses during the marriage are considered marital assets. However, the two most notable exceptions to this rule are gifts and inheritance money. Generally speaking, life insurance payouts or proceeds fall under the general category of inheritance, despite the fact that they are not connected to “typical” estate planning items like wills or trusts. This is why it is not all that surprising to see the Superior Court of Pennsylvania rule the way it did. 

That being said, life insurance proceeds can still become commingled with marital assets if spouses are not careful. Investing that money into real estate during the marriage can lead to a tricky situation during a divorce. The spouse who initially received the insurance payout must then hire an expert to “unravel” and separate the funds, such as a forensic accountant. 

The Main Issue With Life Insurance Policies in a Divorce

The reason why life insurance plays such a major role in divorces is simple. The vast majority of individuals with life insurance policies name their spouse as their primary beneficiary. In the case of a nasty split, most individuals want to remove their former spouses as beneficiaries as soon as possible. While this is relatively easy to do with a revocable life insurance policy, it is much harder to accomplish with an irrevocable life insurance policy. 

In any case, the actual cash value of the policy is considered part of a spouse’s net worth when they divorce. This means that in most cases, spouses will walk away with roughly half the value of the life insurance policy. In some situations, spouses will intentionally leave their former spouses as beneficiaries in an effort to ensure that child support payments can still be made after their passing.