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Divorced? Here's how to re-assess your insurance needs

Divorced? Here's how to re-assess your insurance needs

Insurance is an investment whose terms and conditions change following a divorce. Here is what you must do to avoid hassles later on.

Insurance is an investment whose terms and conditions change following a divorce. Here is what you must do to avoid hassles later on.

New Beneficiaries

When you untie the knot, the first thing you must do is remove your spouse's name as the nominee in your life insurance plans. The new nominee can be any blood relative.

"A letter stating the reason for the change in nomination will have to be submitted to ensure that the new nominee has insurable interest in the life covered," says Yashish Dahiya, CEO, Policybazaar.com. A person has 'insurable interest' when the death of the policyholder causes direct financial loss.

The easiest would be to nominate your children. Of course, there is the option of trusting your divorced spouse to pass on the proceeds to the rightful beneficiaries.

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Insurance policies have nominees for quick disposal of claims. If the nominee is not the lawful claimant of the plan's proceeds, it is his duty to transfer the benefits to the legal heirs as stipulated by the law or the policyholder's will.

Quote

Investments, especially long-term, need to be split rationally. In case of Ulips, it is best to share the proceeds at the end of the investment tenure.

BIMAL GANDHI

Chairman, Ameriprise India

If the nominee is a minor, the policy will have an 'appointee'. "In case of the policyholder's death or maturity of the plan, the money will go to the appointee, who will act as a caretaker," says Dahiya.

It is more complicated if you have named your spouse as an 'assignee'. Assignment means transfer of rights (and liabilities) of the policy to the assignee.

This means your spouse has sole rights to the instrument. Any change in the policy, be it nomination or reassignment, requires the assignee's approval. So, ensure your spouse reassigns you the policy before the divorce.

Joint-life plans, which is terminated when one spouse dies, are not popular in India. In case you do have such a plan, you'll have to let it lapse as insurers do not split joint-life plans.

Schemes that have an investment component, such as unitlinked plans (Ulips) and endowment policies, are settled based on the contribution of each spouse.

"Ulips and endowment policies are valued on a current-date basis," says Dahiya. A Ulip is worth its net asset value on the day the calculation is done, while an endowment policy, with a guaranteed amount, is worth its present value. Since a Ulip is a longterm investment, premature closure may mean a loss.

"Assets, especially long-term investments, need to be split rationally. In case of Ulips, with a penalty for premature surrender, it is best to have a legal arrangement to share the proceeds at the end of the investment tenure," says Bimal Gandhi, chairman, Ameriprise India.

Health Covers

Health insurers offer the option of removing a beneficiary's name during the policy term. This means the principal proposer can remove the spouse or children from the policy document.

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"When such a request is made, the contract is changed and the premium is refunded prorata," says Antony Jacob, CEO, Apollo Munich Health Insurance.

To ensure there is no break in coverage, the spouse and children can apply for a new policy with the same insurer. "They will continue to get the benefits of the previous policy," says Antony.

For the Future

You must re-assess your insurance needs after a divorce, especially if you have custody of the children. You may have to increase your life cover and a health cover is a must for single parents.

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You can also decrease the cover if you plan to remain single and don't have dependents. But, do consider your goals and uninsured liabilities when deciding. For instance, reducing the cover can be a mistake if you plan to take a loan. Health and age are factors when underwriting a policy and increasing coverage later on can be expensive.

Moreover, if your children are the beneficiaries, it would be better to keep the same sum assured.