Life insurance is an often overlooked asset in divorces. It may or may not be a significant issue but it most certainly should be analyzed.
Term or Permanent? Community or Separate?
Life insurance may be characterized as community property or separate property. The community may have a right to reimbursement of premiums paid during the marriage on a separate property policy.
There are two basic types of life insurance: term insurance and permanent insurance.
Term insurance is basically insurance that the owner is renting for a specific and limited period of time. If the insured does not die during the defined period, no death benefit is paid by the insurance company. There are a number of different types of term life insurance policies.
Permanent insurance falls into one of two basic categories: Universal life and whole life. Universal life policies have a number of variables and are distinguished from whole life, in part by the fact that the insured has the right to invest the cash value of the policy and select from a menu of investment options. Variable policies offer the owner of the policy a variety of the flexible options relative to the amount of premiums paid.
Whole life is the traditional form of permanent life insurance. The terms of a whole life policy provide for a fixed return on the investment portion of the policy. The insurance company directs the internal investments. A whole life policy has a cash value and may also pay a dividend.
All permanent policies have a cash value and most have a surrender value. The surrender value is the sum that will be received by the owner if the policy is cancelled. The surrender value is less than the cash value.
The cancellation of a policy may generate a tax if there are capital gains on the internal investments in the policy itself. Policies allow the owner to borrow a portion of the cash value which is reflected as "policy loan."
A policy insuring the life of a seriously ill individual may have value to a "life settlement" firm, if sold.
Life insurance may be utilized as security for child support, spousal support or relative to an equalization payment. Life insurance may be an important term in a prenuptial agreement.
Term insurance policies are 100% pure insurance. There is no investment/cash value component.
Permanent insurance policies have two components: pure insurance and an investment/cash value component. The ratio of the two components changes over the term of the policy depending on the policy terms and the internal investment performance. The ratio may increase or decrease during the term of the policy. At the end of the policy term, the death benefit may be almost entirely investment/cash value and very little pure insurance.