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The divorce process can take a huge emotional toll on people. Apart from dealing with the potential trauma of the split, they also have to discuss dividing financial assets and how best to move forward for their children. As part of the process, the couple may have to reconsider the term plan policy they bought while married.
Let’s look at what happens to term plans after a divorce:
Understanding Assets
Once a couple files for divorce, they often list all their shared assets. As part of their split, they must find a way to divide the assets equally and fairly. If the couple has any term plans, they must get listed under assets. A professional should help list and divide assets to ensure everything is fair.
Let’s see how a divorce affects a term plan:
The beneficiary is any individual or institution that receives a monetary benefit from the term policy. Most working individuals list their spouse as the beneficiary in a term plan. After a divorce, the policyholder may want to update the beneficiary to a child or parent.
The nominee is the individual who holds the policyholder’s property until they can legally distribute it as per the insured’s requests. For most married people, the spouse is the nominee. After a divorce, the policyholder could change the nominee to ensure it is somebody that has the beneficiary’s best interests at heart. In many cases, the nominee and beneficiary are the same.
Some term plans do not allow policyholders to make changes to the beneficiary. If the policyholder lists their spouse as an irrevocable beneficiary, they cannot make any changes - even after a divorce.
The Married Women Property (MWP) Act secures a woman’s finances. While purchasing a term plan policy, the husband can file for a simple MWP to ensure the payout goes only to his wife and children. The MWP separates the term plan from the rest of the individual’s estate, ensuring that creditors cannot stake a claim for the payout. Under the MWP, the policyholder can name only their wife or children as the beneficiary. If the beneficiary is a minor, they must appoint at least one trustee to manage the trust until the payout gets made to the beneficiary. The policyholder cannot change the beneficiary at any point. If the insured names their wife as the beneficiary, she will receive the payout even after a divorce.
Individuals going through a divorce must prioritise safeguarding their financial interests for the future. To this end, they can:
On the other side of a divorce, it can seem difficult to pick up your life and move on, but you must. You must now re-evaluate your finances. If you have become a single parent, you should think about increasing the sum assured on your term plan policy. Make sure you have savings and investment plans so you can achieve your other financial goals and aspirations without relying on anybody else. Crucially, you must ensure that you completely separate your finances from your ex-spouse. If you have children, you may have to contribute to certain expenses equally, but the rest of your finances must remain independent.
During a divorce, dealing with a term insurance plan is not a priority. However, failing to make the necessary changes or separating your finances could have consequences in the future. Separating a lifetime of joint finances is not easy, but both parties must approach the situation with clear heads to make the right decision for themselves, each other, and their children.
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