How Divorce Affects Health and Life Insurance
Understanding how the dissolution of a marriage affects such things can help put parents on solid footing after the split
Even when it’s clear that divorce is the best option, dissolving a marriage can be an anxiety-provoking process. Decisions about where parents will live or who will have custody of their kids can turn into heated battles.
And then there’s the challenge of handling the financial fallout. It’s not just alimony and child support parents need to think about. Inevitably, the divorce will tear or strain the safety net one used to share with their spouse — including health insurance. Understanding how the dissolution of a marriage affects those products can help put parents on solid footing after the split. Here’s how adults in the midst of a divorce can continue to protect their income and save for the future.
In most states, divorcees cannot stay on their ex’s workplace health plan. So those who used to get coverage that way are now on their own. If parents are fortunate enough to have a job that subsidizes their premium, that might not be such a big deal. Divorce counts as a “qualifying life event” that enables one to purchase coverage outside the open enrollment period.
But, according to Colleen Haddow, a Fairfax, Va.-based partner with the DiPietro Family Law Group, timing is critical. With most plans, employees have to notify their employer within 30 days of a signed divorce decree, or that window closes. “It’s really important to get a copy of the order in your hands as soon as you can and get it to HR,” she says.
For stay-home parents or those who work for a smaller employer without an insurance plan, options aren’t as rosy. One possibility is to sign up for a continuation of their former spouse’s workplace plan through COBRA. After a divorce, the law allows parents to stay on their plan for up to 36 months.
There’s a catch, though. His or her employer won’t be subsidizing your coverage, so parents will pay the full price of the premium – plus a two percent administrative fee. That usually makes it an expensive way to go. “I rarely see recommend COBRA as a good financial idea,” says Haddow.
Shopping for individual coverage on an exchange is often a better alternative. Parents can search through different tiers — gold, silver, and bronze — to match their budget. Rates have been rising over the past couple years, but if parents meet federal income guidelines, they may qualify for tax subsidies that will help offset their expenses.
Maintaining coverage for children is usually an easier proposition. The Affordable Care Act allowed parents to keep children on their employer’s plan until they reached age 26, which is typically a cheaper option than shopping on an exchange.
Some states have strict guidelines on how the parents will split the cost of that coverage. Otherwise, it needs to be clarified in the settlement agreement.
“Ninety-nine percent of the time, parents want to make sure their kids are insured,” says Haddow. “They realize that if their 21-year-old has a major medical issue and they’re not insured, they’ll be the ones footing that bill.”
Often, life insurance is just as important after a divorce as it is during the marriage. If parents are depending on alimony or child support to make ends meet, they’ll want a safeguard in case their ex- passes away prematurely. In fact, some states will order the bread-winning spouse to have a policy that names their former spouse as the beneficiary.
Haddow advises clients who provide financial support to stipulate the amount of time they need to maintain coverage. Such limitations are especially helpful when parents depend on a workplace policy to meet their insurance obligation. Should parents lose their job at a later date, they could find themselves having to buy comparable coverage that’s now much more expensive because of age. “You could be stuck paying an extremely high premium,” she says.
For that same reason, those who already have a term policy should make sure their obligation doesn’t exceed the length of their policy. If, for instance, a parent’s term ends after 18 years, they don’t want the obligation to maintain coverage for 20 years.
At that stage of parents’ life, premiums will be a lot steeper. And if they’re tight on cash, they risk falling out of compliance with the insurance provision. “That’s when the court can step in and start imposing sanctions,” Haddow explains. “You don’t want that to happen.”
Things are a little different for spouses who previously took out whole life insurance, which includes a cash account along with a death benefit. In cases where there’s a significant balance in the account, couples may want to simply dissolve the policy and cash it out. Depending on the language of the settlement, the supporting spouse may be able to take out a less expensive term policy to satisfy their responsibility.
Not every agreement put the onus on the alimony provider to get coverage, however. In some cases, the lower-earning spouse may simply decide to take out a policy on their ex and handle the premium payments themselves. It’s all part of the negotiation, so parents will want to talk with their attorney about the options at their disposal.