In New Mexico, all property earned or acquired by either spouse during a marriage is community property. In turn, all community property is considered equally owned by both spouses and must be divided equally between the parties as part of a divorce.
As such, if purchased or substantially paid for with community funds, a life insurance policy can be a community asset that must be divided upon divorce. However, whether or not there is really any value to be divided depends on the type of life insurance policy purchased.
Term Life Insurance
Term life insurance provides the policyholder with coverage for a certain amount of time specified in the policy. Term life is usually the least expensive type of life insurance available because it only covers a specified period of time and the premium only pays for the insurance policy. Once the term ends, the policy may be renewed; however, the premium generally increases with each renewal. Term life insurance has no cash value.
Permanent Life Insurance
Permanent life insurance is more expensive than term life insurance because it is effective for the life of the policy holder, as long as the premiums are paid. For the most part, the premium payment will remain the same for the length of the policy. The excess paid into the policy is invested by the insurance company. One benefit to permanent life insurance is the possibility of receiving dividends and interest from the invested premium excess. The policy holder has the option of investing the income, borrowing against the cash value of the policy or terminating the policy to receive the “cash surrender value.” There are several types of permanent life insurance options.
Whole Life Insurance
Whole life insurance provides the policyholder with coverage during their whole lifetime, as long as they continue to pay the fixed premiums. The excess payments from the premiums build as the policy continues. The policyholder then has the option of borrowing from this cash reserve or surrendering the policy to receive its cash value.
Universal Life Insurance
Universal life insurance offers a more flexible approach to permanent life insurance. During the policy, the policyholder may change the amount of insurance, adjust the death benefit and adjust the premium payments. The overall cost of a universal life insurance policy is less than that of whole life insurance. In addition, the policyholder may still borrow or withdraw money from the policy’s cash reserve.
Variable Life Insurance
Variable life insurance allows the policyholder to invest their cash reserves into stocks, bonds and other securities. The death benefit is dependent upon how well the investments perform, but the insurance company will generally guarantee a certain return.
Variable Universal Life Insurance
Variable Universal life insurance allows the flexibility to change the amount of insurance, and change both the premium payments and death benefit. It also allows the policyholder to invest their cash reserves.
Single Premium Life Insurance
With Single Premium life insurance, the policyholder makes one premium payment up-front. The policy immediately accumulates cash value and will distribute its tax-free proceeds to the beneficiaries.
Survivorship Life Insurance
Survivorship life insurance is a single policy that insures two people for a single insurance benefit. When the first person on the policy dies, the second person must continue to pay the premium. Then, after the survivor dies, the insurance company will pay the death benefit.
Given the wide variety of life insurance policies available, it is important for both parties to a divorce to have access to the terms of each policy in order to determine how it is to be divided. Generally, a term life policy does not have a cash value, so there is nothing to divide upon divorce although such policies may still be used to secure child support or spousal support obligations.
Working with an experienced family law attorney can help parties to a divorce gather the necessary information and investigate the applicable law in order to ensure that all community property, including life insurance policies, are equitably divided.