Divorce: Potential Pitfalls in Equitable Distribution of Property

Equitable distribution is the process by which a court divides a divorcing couple’s property. Many couples look to avoid going to court by negotiating a property settlement agreement, which is a contract where they decide how to divide their property. However, it is important to consider all assets, circumstances and contingencies in such an agreement.

Life insurance is often an overlooked piece of the divorcing couple’s portfolio. Spouses who are the beneficiary of a life insurance policy would, in most cases, desire to continue to be the beneficiary of the life insurance policy. The court can order — or the parties can agree — that one spouse is required to maintain life insurance for the benefit of the other spouse. The most important reason for continuing the beneficiary status of one spouse is when the other spouse is paying child support and or spousal support to the other spouse.

Imagine a situation where a husband is ordered to pay child and spousal support to his wife. Three months later, the husband dies without a life insurance policy or with a policy that doesn’t name the children or the wife as beneficiaries. The wife, who was expecting a stream of payments from her former spouse, now receives nothing, and she and her children are in a very unenviable financial position. This situation could have been avoided if the husband had been ordered or had agreed to provide life insurance for the benefit of his wife and children.