A prenuptial agreement is usually thought of as a document for the day a marriage ends. But that is only part of the picture. If the couple will later marry and build a shared financial life, life insurance should be part of the planning from the start.
The reason is simple. A prenup may point to future financial obligations, but those obligations will still need real funding if one spouse dies after the marriage begins. That is why the prenup and life insurance should be discussed together, not separately.
Life Insurance While the Marriage Will Be Intact
If the couple later marries, life insurance will usually be about protecting the household as it exists during the marriage. That will often mean replacing lost income, covering the mortgage, and protecting expected long-term expenses such as future college costs or other family needs.
In that setting, the policy may need a larger death benefit and a longer term. A 20- or 30-year term policy will often make sense if the goal is to protect the family’s broader financial picture for as long as the risk will exist.
What Will Change If Divorce Later Happens
If the marriage later ends, the life insurance need will usually become much narrower. At that point, the policy will no longer be about replacing all the insured spouse’s future income for life. It will need to line up with the smaller set of obligations that remain under the prenup and the final Divorce Settlement Agreement.
That may mean the coverage amount will need to come down. It may also mean the term will need to be shorter, because the policy will only need to last until the last obligation ends. If the remaining obligation ends in 10 years, there will be no reason to keep paying for coverage that runs far beyond that.
That is why a policy that will make sense during marriage may not make sense after divorce.
What Is Insurable Interest?
Insurable interest means there will be a real financial loss if the insured spouse dies, and the amount of coverage should not exceed that loss. Put another way, that insurance coverage should match the actual potential economic harm, not create a windfall.
Once the couple is married, insurable interest will usually be clear. Should divorce happen in the future, the amount of coverage needed to secure support and other post-divorce obligations should be recalculated to an amount equal to the beneficiary’s total possible financial loss, and the term should run only as long as those obligations remain.
If a policy that was put in place during the marriage will still be used after divorce, it should be reviewed so the face amount and term still fit the narrower post-divorce obligation. If the coverage will be too large or the term will be too long, the policy may need to be reduced or replaced.
However, replacing that policy may not always be doable. The insured may become uninsurable later, or the cost of new coverage may become cost prohibitive.
Why You Should Address Life Insurance in the Prenup
A prenup is the perfect vehicle to address how life insurance should work if the marriage later changes. If the agreement already covers who will own the policy, who will pay the premiums, who will be the beneficiary, and what will happen if divorce occurs, there will be less room for confusion later.
That’s important because the policy that works for a married couple will not necessarily work after divorce. The coverage amount may need to come down, the term may need to end sooner, and the beneficiary will need to shift from spouse to former spouse.
If the prenup does not address those points up front, the couple may end up sorting out insurance at the same time they are sorting out the divorce itself. That is when mistakes can happen or that entire discussion might fall through the cracks and not even be addressed.
What About Child Support?
Basic child support cannot be dealt with in a prenup, because those obligations will be decided during the divorce process and reflected in the final Divorce Settlement Agreement.
However, the couple can deal with child-related expenses beyond basic support in the prenup agreement, such as extracurricular activities, education expenses, and health insurance. To the extent possible, this should be done even though most engaged couples will not have any children when negotiating the terms of their prenup.
The prenup should also state that both expected basic child support and those expenses beyond basic support will be included later when determining the total amount of life insurance coverage needed after divorce, all of which should be incorporated into the final Divorce Settlement Agreement.
Who Should Own the Policy?
In many cases, the spouse who will be the beneficiary of the policy should own it. That will give the protected spouse more control over the premium payments, the beneficiary designation, and the continuance of the policy.
If the other spouse owns the policy, there will always be a risk that the coverage will get reduced, changed, or dropped without warning.
If Divorce Happens in the Future
If at some point the marriage comes to an end, the prenup should already lay out the guidelines for the life insurance policy.
At the very least, it should state who will be the policy owner, who will pay for it, whether the beneficiary will be irrevocable or not, and what happens if the coverage needs to be reduced or becomes too expensive to replace.
In Conclusion
A prenup will be a good place to plan for life insurance before there is a problem. The right policy can protect the household while the marriage is intact, and it can also be structured so it can be adjusted later if divorce changes the obligations.
If you are putting together a prenup that includes financial commitments, it will be worth asking whether the life insurance behind it really matches the risk at both stages.
Jeffrey A. Landers, CDFA®, CDLP® is the Founder and CEO of Hello Monthly Income™, LLC, a specialized nationwide insurance agency that helps divorcing people protect their receipt of alimony and child support payments with life and disability insurance.
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