Life Insurance and Divorce in North Carolina

Life insurance is often one of the most overlooked aspects of a divorce in North Carolina. It can be difficult to define and categorize, and spouses may be unsure how to approach this issue. The underlying value of a life insurance policy may be questioned, and it may not be clear whether this constitutes a marital or separate asset. But even with all of these uncertainties, it makes sense for spouses to approach life insurance with an efficient, calculating mindset. For many, this may constitute one of the most high-value assets in the marital estate. This is particularly true for elderly spouses going through so-called “gray divorces.”

A divorce settlement occurs when spouses hash out the details of their divorce outside of court. This gives them the freedom to handle numerous subjects according to their best interests – including the subject of life insurance. Many spouses believe that it is in their best interests to maintain existing life insurance policies after divorce, and a divorce settlement may mandate the maintenance of such a policy.

The reasons for maintaining the policy are obvious. One spouse may be tasked with paying child support and alimony after the divorce. But if this spouse dies, there is a very real risk of these payments suddenly ceasing – leaving dependent spouses without money that they had become reliant on. A life insurance policy can solve this issue by ensuring the continued payment of this support.

This means that as spouses create their divorce settlements, they may agree that the life insurance policy should maintain its current status, with children or the spouse as beneficiaries. If no such life insurance policy exists, spouses may mandate the creation of this policy as part of their divorce settlement.

Of course, spouses do not necessarily need to maintain the life insurance policy at the time of a divorce. There may also be the option to divide the cash value of the policy. This is accomplished in the same way as dividing any other marital asset. During the property division process, the life insurance policy would be listed as a marital asset. Its cash value would then be determined. In an equitable division state like North Carolina, both spouses can expect to walk away with approximately half of this cash value.

Of course, cashing out the life insurance policy means that it no longer exists. In other words, there is no longer any “safety net” in the case of the paying spouse’s passing. Spouses receiving child support and alimony may wish to maintain the policy to ensure that this safety net remains in place. Of course, some might prefer to simply take the cash value. Spouses must determine the best option for their specific situation.

If a spouse pays into a life insurance policy during the marriage, the cash value of these payments would likely classify as marital property. That being said, the entire value of the life insurance policy may not be marital property. For example, a spouse might have established their life insurance policy very early in life. They may have been paying into their life insurance policy for 20 years during a previous marriage. The same policy can carry over into a new marriage. If the new marriage only lasts three years, then the majority of the policy’s cash value is clearly separate property.

The life insurance policy may have been created when the spouses were still unmarried. For example, a boyfriend might have obtained a life insurance policy to provide for his girlfriend in the case of his passing. The relationship may go on for many decades before the pair finally get married. During these decades, premiums paid into the policy would likely constitute separate property.

This commingled asset would likely pose challenges during a divorce, but the spouse who established the policy should get access to this separate property. With no children in the marriage, it also makes sense to immediately change the beneficiary on the policy. Keeping an estranged spouse or an ex-spouse on the policy may create a situation where the ex profits from the policyholder’s death.

If you have been searching for a divorce attorney in North Carolina, look no further than Arnold & Smith, PLLC. Over the years, we have assisted numerous divorcing spouses in the Tar Heel State. We know that spouses may encounter a number of potentially complex assets during the property division process, and life insurance is only one example. We have experience with collaborative law, high-net-worth divorce, and complex asset division. Book your consultation today to approach this subject with confidence and efficiency.