Navigating Life Insurance in Prenups: Dos and Don'ts

Dividing life insurance policies can be complex when you have a permanent or whole life insurance policy with cash value. Fortunately, there are ways to divide the accumulated cash fairly, if not equally. One option is an equitable division, wherein both parties receive an equal amount of the cash value. 

Alternatively, if one party wants to keep the policy, they can pay a lump sum to the other party – this is called a policy buyout.

If the split occurs under more amicable terms, both parties may keep the policy active but designate the ex-spouse as a co-owner or co-beneficiary.

If the couple has a term life insurance policy, they can easily convert it into two separate policies to retain coverage and avoid future disputes. 

Your real estate, personal property, and financial rights change when you get married. Thus, studying how marital rights interact with your life insurance policy can help you navigate the complexities of a potential divorce.

Every Canadian province has different laws regarding martial rights, including spousal support and asset entitlement. You can better understand these laws by consulting a provincial lawyer and ensuring spousal rights don’t invalidate your prenup clauses. For example, a spouse might still be entitled to receive a portion of the life insurance benefit even if the prenup dictates otherwise. 

You can work with your lawyer to include spousal support provisions in the prenup, clarify ownership and beneficiary designations, and address possible changes in circumstances to ensure a fair split in case of a divorce.

Reviewing your life insurance policy regularly is a straightforward way to ensure it doesn’t clash with your prenuptial agreement. It’s best to facilitate annual check-ins or have a post-life event review, such as having a child or experiencing significant asset changes. 

During these meetings, ensure beneficiary designations match your prenup and update primary and contingent ones. For example, if your prenup states that an ex-spouse can’t receive any benefits, ensure they aren’t listed as a beneficiary in your life insurance policy.

Single life insurance policies don’t automatically meet the needs of both spouses. Remember, life insurance is a personalized financial tool, and it’s important to pick a policy with the appropriate insurance needs. For instance, if one spouse is the primary breadwinner, they may need significantly higher coverage. During your prenup application, you might specify that each party should have a specific amount of coverage based on your unique financial responsibilities.

In addition, naming both spouses on a single policy can quickly become complicated. For example, your prenup might state that one spouse will maintain control of the policy if you divorce, but there won’t be clear-cut ownership with a joint policy.

Just because you stated one thing in your prenup agreement or policy doesn’t mean you can’t revisit these terms later. However, the easiest way to avoid complications is to keep the terms flexible to begin with. Nothing is set in stone, and making these terms too rigid can make it exceptionally challenging to change things after significant life events. 

Stay flexible by allowing for periodic reviews and updates with your family lawyer. These regular meetings ensure your life insurance policy remains aligned with your prenup agreement.

Forgoing professional advice when including life insurance in a prenup can lead to potentially costly mistakes and misunderstandings. Remember, a prenup must be legally sound to be enforceable, and a lawyer can ensure your agreement complies with provincial laws. They can also help avoid pitfalls involving legal guidelines, asset division, and tax implications. 

A lawyer can also help with long-term planning, especially when adapting to life changes like financial shifts, changes in health, and other significant life events.