How to untangle your insurance plans in divorce

NEW YORK Tue Sep 11, 2012 10:50am EDT

A bride sits on a wall opposite the Houses of Parliament during a wedding photo shoot in central London January 6, 2012. REUTERS/Stefan Wermuth

A bride sits on a wall opposite the Houses of Parliament during a wedding photo shoot in central London January 6, 2012.

Credit: Reuters/Stefan Wermuth

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NEW YORK (Reuters) - When Kristen Lash officially ended her marriage in March, she also gave up her insurance plans. And it was almost as complicated to divorce her health insurance as it was her spouse.

The Boston massage therapist says her ex-husband tried at first to put a time limit on her coverage, add costs and put in an option to have her removed without notice. Then at the start of this year, his employer changed plans, and suddenly her co-payments jumped to $140 from zero.

"All of that, on top of going through a divorce and the various issues that were at play in the divorce, trying to make sure I was covered was stressful to deal with," says Lash, 32.

Fortunately, she had recently started a new job. After about a month of spending about $500 on prescriptions, she was able to get on her own employer's health plan, which takes out about $70 from each paycheck.

Health insurance woes always make the headlines, but it is easy for divorcing couples to forget that there are numerous other insurance changes to make, including to life, home and car.

Failing to make changes, including dropping your ex from a policy or getting your own insurance, can cause you to be overinsured, underinsured or not being insured at all. Here is what you need to consider:

1. Health insurance

You may be tempted to say nothing to your insurer and just keep your ex-spouse on your plan even after the divorce, but lawyer Iris M. Bass of Fort Lauderdale, Florida, says this could backfire.

"If there's a problem and your carrier finds out the ex shouldn't be covered, they can drop him or her because of insurance fraud," Bass says. "Do you really want to take that risk?"

A divorcing spouse will be eligible for COBRA - temporary coverage under the other spouse's plan, but at full cost - and maybe Medicaid - the federal program for the poor.

If there are minor children, couples must decide whose plan to put them on, and if they need to set up a rotation for sharing the cost of that coverage.

Once the U.S. Affordable Care Act is in full swing in 2014, individuals will be able to shop for insurance through new state-based Affordable Insurance Exchanges. But until then, the only other choice is the open market, which can be too expensive for a spouse who is self-employed, unemployed or in a low-paying job.

Right now, a single divorced person can expect to pay around $300 a month, according to the Kaiser Family Foundation.

2. Life insurance

Untangling life policies is not just a matter of changing beneficiaries, says Travis Snyder, an insurance agent with State Farm in Ashland, Ohio.

Often, a life insurance policy is owned by the primary breadwinner, with the spouse covered on an attached policy, or rider. But since the owner of the policy controls all decisions about it, including the naming of beneficiaries, the spouse would have to be released from the policy to change any details, or buy his or her own policy to name a different beneficiary, says Snyder.

Even though it would mean lower payments if, for instance, a husband dropped his wife from the policy, some spouses may feel that they will need extra income for childcare if the spouse dies. Or, says Snyder, it may just be a power play not to release a spouse.

Insurance coverage can be written into a divorce settlement - the laws in your state may dictate some of what you can or cannot do - and a spouse may be required to maintain life insurance for an ex to cover missing alimony payments.

Once the dust settles, it is important to make sure payments are made by the designated party and to re-evaluate needs. For instance, as your children reach adulthood, you might find that the benefits can be reduced.

Some spouses may find their life insurance needs increasing after a divorce. Lisa Davis, a 45-year-old stay-at-home mom in Providence, Rhode Island, now spends more for her coverage than her eventual ex-husband paid when they were under one roof. A $1 million life insurance policy, which will roll over into a trust if anything happens to her, is setting her back $1,000 a year. She also has a $1 million umbrella policy that costs her $130 a year.

Of course, a spouse should not forget other policies and paperwork as well - like 401k and workplace life insurance beneficiaries.

You may also want to remove your spouse as the key person on an advance healthcare directive. "If you're incapacitated, you don't want someone who doesn't like you deciding whether you should be left on life support," says Christie Alderman, vice president of Chubb Personal Insurance.

3. Auto insurance

Assuming the two cars you have previously had on one plan are now at two different residences, you and your ex need separate plans. As you would expect, you will see your individual rates drop considerably.

If you need help paying for your car insurance, it is best to get the money as part of an alimony package, says Snyder, who has seen some exes get taken off a policy without being told.

4. Home owner's insurance

This is easy to forget, but you should be able to reduce what you are paying, especially if your ex has taken half of your stuff. But if you are the spouse who has moved out and are now renting, you will want to look into a renter's policy, says Chubb's Alderman.

The average home insurance payment is between $45 and $75 per month, according to InsuranceProviders.com; renter's insurance could run between $15 and $30 monthly, according to the National Association of Insurance Commissioners.

Lisa Davis, who was paying around $800 a year in homeowner's insurance before selling her house, now spends about half that for her renter's insurance.

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(Editing by Beth Pinsker Gladstone and Lisa Von Ahn)

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