Many life transitions come with financial planning opportunities or decisions. Job changes, selling a business, retirement, death, and divorce are just a few examples of when financial planning becomes more important. This quarter, we continue to focus on financial planning decisions that come with divorce. In the midst of this unexpected, challenging, and stressful life event, knowing what decisions need to be made can help you stay focused on what is within your control. Last week, we focused on issues related to tax planning, cash flow, and long-term planning. This week, we’ll help you identify insurance issues you need to consider during a divorce, along with a few other issues like college planning for children and identity protection.
PLANNING FOR INSURANCE DURING A DIVORCE
Are you insured under your spouse’s health plan?
If you are covered under your spouse’s health plan, and your spouse’s employer has at least 20 employees, you can elect COBRA continuation coverage to stay on that plan for 36 months after the divorce or legal separation. Generally speaking, COBRA is quite expensive. You get to keep the same plan, but the employer no longer pays for a portion of the coverage. So you’re on the hook for the entire monthly premium. If cost is a priority, you may consider other options right away. When the priority is simply to have coverage — and you don’t have the appetite for analyzing options quite yet — this could be a viable option.
If you are employed, you may be able to enroll in your employer’s health plan during a special enrollment period as a result of the divorce. This is an easy alternative to COBRA. And if your employer covers a decent portion of the cost, it may be substantially less costly than COBRA. In a typical year, you need to wait until open enrollment to join your employer’s plan. However, events like divorce may be an exception to that rule.
What if neither COBRA nor your employer’s plan is an available option for your set of circumstances? If you will lose coverage due to your divorce, you have 60 days after your divorce to enroll in the Health Insurance Marketplace.
Has there been a change in the amount of life/disability coverage you need?
If you were relying on your spouse’s assets or income to self-insure against a premature death or disability, and you no longer have the resources to self-insure, there may be a need for a new or increased policy. Alimony (whether you’re the one receiving or paying it) impacts your income, and income is a big variable that matters when calculating the need for insurance. Your new budget will also matter.
Work with a fee-only financial planner to determine whether your coverage needs have changed. If you work with a financial planner or insurance agent who receives a commission when selling you a policy, they have a conflict of interest in recommending a policy. A fee-only financial planner can assess your needs with minimal conflicts of interest.
Do you need to update homeowners or renters insurance?
If so, consider removing your spouse from the policy and adjusting the amount of coverage needed after the divorce. If you’re updating these policies, it may be time to have your insurance agent shop carriers to ensure you’re receiving a fair price and adequate coverage. Work with an independent agent who can quote multiple carriers. This is an example of when it pays to work with an independent insurance agent who can shop around on your behalf. Delegate that task to an independent agent so you don’t have to spend time finding the best deal.
Do you or your spouse own life insurance?
You may need to update beneficiaries on life insurance policies. It’s not uncommon for divorced clients to share their insurance policy details with us, and an ex-spouse is listed as beneficiary. You’ll also want to address any survivorship policies. A survivorship policy pays out when the second spouse dies. If you have such a policy, contact the insurance company to see if the policy can be split.
Will your divorce settlement use life insurance to secure payment obligations?
If so, ensure that the proper maintenance and monitoring methods are in place.
Do you and your spouse own long-term care insurance with a shared benefit rider?
If so, consider dropping the shared rider or incorporating it in the division of assets.
OTHER ISSUES TO CONSIDER DURING A DIVORCE
Do you have dependent children who will likely go to college?
If the student is applying to schools that require FAFSA, information from the custodial parent may be required. If the student is applying to schools that require CSS Profile, information from both biological parents may be required.
Do you need to take steps to protect yourself from identity theft?
Update passwords and opt for multifactor authentication. A password manager can also help you minimize the duplication of passwords. Password managers can help you manage credentials for several websites and apps. They keep your logins secure, but you don’t have to dedicate too much brain space to remembering usernames and passwords.
You may also want to freeze your credit lines or place a fraud alert with the reporting bureaus. A fraud alert still allows you to apply for credit, but you’re notified if someone attempts to apply for credit using your social security number. A credit freeze, on the other hand, won’t allow anyone to apply for credit — including you. It’s a more extreme measure, but if you don’t need to apply for credit in the near future and you’re concerned about fraud, it’s a good option to consider.
Are there state-specific issues to consider?
Community property states (LA, AZ, CA, TX, WA, ID, NV, NM, and WI) consider all income, assets, and debt earned or acquired during marriage to be jointly owned.
There are also some state-specific issues related to life insurance. If you or your spouse will be retained as a beneficiary after the divorce on a life insurance policy owned by the other, ensure that the state rules are followed.
As you work through these issues, make sure you’re leaning on your support team of friends and family. Remember, professionals like your divorce attorney and financial planner are a part of your support team. As much as possible, delegating tasks to others, if you can afford it, allows you to focus more on your own wellness. Our next topic will discuss just that — focusing on your wellness. Then, we’ll turn back to finances and round out our series by discussing issues related to taxes and debt.