During divorce, life insurance policies—specifically, term life and whole life insurance—can impact support obligations and the division of assets. Both types of policies serve different purposes, and understanding their similarities and differences helps plan for effective management of financial responsibilities post-divorce.
MOST IMPORTANT INFORMATION: Everyone who files for divorce in New Jersey must disclose insurance coverage, including life insurance. Insurance coverage identified at that time must be maintained pending further order of the court.
Similarities Between Term Life and Whole Life Insurance
Death Benefit: Both term and whole life insurance provide a death benefit to beneficiaries upon the policyholder's death. New Jersey courts routinely require that the death benefit be used to secure support obligations for children or a former spouse.
Premium Payments: Both policies require regular premium payments which can change over time. The payor and the potential beneficiaries must understand that these costs deplete resources for other spending, during and after divorce proceedings.
Beneficiary Designation: In both cases, policy owners can designate beneficiaries to instruct who receives the death benefit, which can play a significant role in estate planning and financial security for dependents.
Differences Between Term Life and Whole Life Insurance
Duration: A Term Life Insurance policy provides coverage for a specified term—typically 10, 20, or 30 years. If the insured person passes away during the term, the beneficiaries receive the death benefit. If the term expires, there is no payout. Knowing the expiration date is critical for securing support for as long as it is payable.
In contrast, Whole Life Insurance is a permanent policy that covers the insured for their entire lifetime, if premiums are paid. It accumulates cash value over time, which can be accessed or borrowed against. Borrowing probably diminishes the death benefit and may need to be restricted if this policy is used to secure support obligations.
Cost: Term Life Insurance generally costs less, making it a popular choice for those seeking coverage for specific financial obligations, such as child support or alimony. Whole Life Insurance is a savings vehicle, so the cost will be higher, and the owner will accumulate value over time.
Cash Value Component: A Term Life Insurance policy has only a death benefit, no cash value. A Whole Life Insurance builds cash value that can be borrowed against or cashed out. This can be a significant asset during divorce proceedings and may require careful valuation and consideration in asset division.
Divorce impacts every aspect of financial plans, including insurance. The family law team at Cohn Lifland knows that each type of policy serves distinct purposes, impacting both support obligations and asset division. Contact us for more information about protecting current and future economic plans for you and for your children.