INSURANCE INFORMATION INSTITUTE
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NEW YORK, October 14, 2010 —
Although statistics vary, many sources say nearly half of all marriages in the U.S. are likely to end in divorce. But no matter the figure, the transition through separation and divorce can be daunting. Many aspects of your life will inevitably be affected—including your insurance needs, according to the Insurance Information Institute (I.I.I.).
Couples face the arduous task of separating not only emotionally but financially, and that includes insurance,” said Loretta Worters
, vice president for at the I.I.I. “Divorce can also have a serious impact on a couple’s credit standing, both in terms of dividing joint debt that exists at the time of the divorce as well as the expenses that come with starting a new life.”
The I.I.I. suggests couples review the following coverages if they plan to separate or divorce:
1. Auto Insurance
A separated or divorced couple will need to decide who gets which car. If there is a change in the ownership of a car it will also entail a change in who holds the insurance policy. If you or your spouse changes your address, you should get a separate auto policy immediately. And if either of you needs to buy a new car, you should arrange for a new auto policy before the car is registered. Removing a former spouse from the insurance policy also protects you from possible liability if he or she is involved in an accident and gets sued.
“If you are separated and your spouse is paying the insurance bills, make sure to provide your contact information to the insurance company as well,” said Worters. “This way you can be notified if your spouse is in arrears. You don’t want to find out after an accident that your coverage was cancelled for lack of payment.”
If you have joint custody of a teen driver, you should be aware that he or she will likely be placed on the policies for the cars in each of the households, which can be more costly. Other situations that can affect your auto policy rates include one person moving to another part of the state or to a different state, or changing from a secondary to a primary driver on a vehicle. Furthermore, multi-car discounts often no longer apply because each vehicle is now at a different residence.
2. Homeowners and Renters Insurance
The person who stays in the marital home after the divorce will need to make sure that the homeowners insurance is under his or her name. Likewise, the person moving out must make arrangements to purchase a new homeowners or renters policy for the new residence.
If you are the one staying in the house, it is important to review your current policy coverages to determine if they are still appropriate. Check to see whether you have actual cash value or replacement cost coverage for both the structure and the contents of the home. Your policy needs to cover the cost of rebuilding your home at current construction costs. Unfortunately, some homeowners simply purchase enough insurance protection to satisfy their mortgage lender. Others confuse the real estate value of their home with what it would cost to rebuild it. Quite simply, you should have enough insurance to rebuild your home in the event that it is completely destroyed. Be sure to also consider the following:
- Replacement Cost. Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality.
- Extended Replacement Cost. Provides additional insurance coverage of 20 percent or more over the limits in your policy, which can be critical if there is a widespread disaster that pushes up the cost of building materials and labor.
- Inflation Guard. This coverage automatically adjusts the rebuilding costs of your home to reflect changes in construction costs. Find out if your policy includes this coverage or if you have to purchase it separately.
In the event your belongings are stolen or destroyed by an insured disaster, an actual cash value policy pays to replace them minus a deduction for depreciation, while replacement cost pays the full amount that it would cost to replace the item today. You should also check to see what the deductible is. A low deductible means higher premiums, while a large deductible can save you money on the policy, which can be useful if you are living on a smaller income in the wake of a divorce.
If you are adding a sprinkler system or security system to the home because you are now living alone, the insurance company should be notified as the upgrades may qualify for a discounted rate. If you are moving out of the marital residence and into an apartment, you still need insurance to protect your personal possessions.
Aside from reviewing the basics of your policy, it is important to consider the impact of the divorce settlement on your homeowners insurance. In most divorces, possessions are split between the parties, so if you have an existing home inventory, it should be updated; if you do not have an inventory, it is a good time to create one. To make this task easier, free, online home inventory software is available at www.KnowYourStuff.org
. Also, if one party receives valuable jewelry, art or other luxury items in the settlement, the insurer will need to be informed whether to cancel or add any special floaters or endorsements to the policy for these items.
3. Life Insurance
Married couples buy life insurance for a variety of reasons that include covering existing and anticipated debts and financial obligations as well as providing an income and/or inheritance for their dependents in the event of the death of one or both of the spouses. When a couple divorces, these obligations generally still exist, so the issue of what to do with existing life insurance policies should always be considered during the divorce settlement.
Married couples often list each other as the primary beneficiary on life insurance policies, and should think carefully before making any changes. There may be good reasons to keep life insurance coverage on a former spouse. If one party is providing alimony and child support to the other, this may mean a loss of income to the surviving party if he or she dies. Some divorced couples may also consider keeping (or purchasing) life insurance on the spouse who has the primary responsibility for raising the children. If he or she dies, costly childcare will need to be arranged and financed. In such cases, the divorce decree should include the funds to pay the premiums on this life insurance policy.
If a divorced couple is purchasing life insurance solely to provide financial protection for their children, they may want to consider purchasing term coverage rather than whole life. Term is generally cheaper and it is designed to provide protection for a specific period of time—for example, until the children reach the age of 21. If there are no children involved, then changing the beneficiary on an existing policy may make sense. A new beneficiary can be named by contacting the insurance company. Beneficiary designations should be reviewed on all retirement accounts, bank accounts, investment accounts and other assets, as well as on any group insurance through an employer.
4. Disability Insurance
Many people own life insurance because they are aware of the risk of dying; however, most people ignore the risk of disability. Yet, between the ages of 25 and 55, a person is more than twice as likely to become disabled through an accident or disease, as they are to die. If a former spouse becomes disabled and cannot work, it could threaten alimony and child support payments, so it is important to safeguard against this possibility by ensuring that his or her income is covered in an individual disability insurance policy.
There are three different types of long-term disability coverage: plans available through the workplace; those available through professional groups and unions; and private disability insurance. The latter option, while more expensive, provides the best benefits. When you buy a private disability income policy, you can expect to replace from 50 percent to 70 percent of income. And, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.) So it is a good idea to specify in the divorce agreement that the spouse providing alimony and/or child support maintain a private disability insurance plan.
5. Long-Term Care Insurance
Long-term care insurance specifically covers the costs of services in a home, such as assistance with activities of daily living, as well as care in a variety of facilities. The need for long-term care services arises from chronic health conditions like cancer, from physical disabilities or even from a military injury. Couples going through a divorce should be sure to take into account both the need to care for aging parents and dependent siblings as well as the cost of this insurance when assessing needs and allocating assets.
A poor payment history on the part of either spouse while married can impair the ability of both parties to obtain individual credit, even after a divorce. The best way to keep your credit intact is to start making changes as soon as you have reached the decision to separate.
- Close joint accounts. It is particularly important to do this before divorce proceedings in case your disgruntled spouse racks up charges that you will be held responsible for later. As long as there is an outstanding balance on a joint account, both parties are responsible for payment. Generally, any debt incurred by one spouse is also the responsibility of the other, regardless of whose name is on the account until after the divorce.
- Check credit scores. As early as possible in the divorce process, pull the most recent copy of your individual credit reports from one of the three main credit bureaus: Experian, Equifax and Transunion. This is something that should be done at least once a year, but it is especially important after major life events such as a divorce. By checking your credit score, you can see if your credit has been adversely affected by the impending divorce. It will also show if there are any shared debts that are being neglected and can point both of you in the right direction when canceling any joint accounts.
- Maintain individual accounts. Women who drop their husband’s name and choose to use their maiden name will not erase the credit history established under their married name, as credit histories are tied to social security numbers, not names. However, in this case, the woman must establish a new credit record under her own name, especially if all her previous credit was held jointly with her husband. In order to expedite this process, consider turning existing joint credit cards, gas cards and retail accounts into individual accounts. Doing this will mean not having to re-establish credit after a divorce.
- Contact creditors. Alert creditors that a divorce is pending. If there is a change of address, make sure they are informed so that bills will continue to be received from all joint accounts so no late fees are incurred.
- Settle with creditors. If the entire debt cannot be paid in full, offer to close the account by paying a smaller amount than is owed. Get a letter from the creditor that the account has been paid in full and a written promise that they will not file anything negative about the account to the credit reporting agencies.
- Freeze accounts. If you are unable to pay off or come to a settlement agreement regarding the balance owed on open accounts, it is advantageous to freeze the account in question. While you cannot use the account that has been frozen, this will provide protection in the long run. Once the divorce is final, the balance owed on the account can be transferred to the party the court holds responsible for the debt.
- Make sure all bills are paid on time. All it takes is one late payment to hurt your credit. Do not skip payments because you think it may ultimately be your former spouse’s responsibility. As long as your name remains on the account, you are responsible for payment.
- Reestablish accounts. The sooner accounts are placed in the correct party’s name, the closer he or she will be to establishing a credit record separate and apart from their former spouse.
THE I.I.I. IS A NONPROFIT, COMMUNICATIONS ORGANIZATION SUPPORTED BY THE INSURANCE INDUSTRY.
Insurance Information Institute, 110 William Street, New York, NY 10038, (212) 346-5500