Losing a spouse or domestic partner through death or divorce can be emotionally devastating.
Yet it’s typically during this difficult time when many financial matters require your immediate attention—such as handling retirement assets, learning to budget on one income, making sure you’re properly insured, or figuring out your Social Security benefits.
Here are six important steps that can help protect your personal finances should you find yourself suddenly single.
When you lose a spouse or domestic partner, whether through death or divorce, you’ll likely need to change the registrations on any financial accounts that you owned jointly. Such ownership changes typically require certain documentation.
If your spouse or domestic partner is deceased, you need to provide your financial institutions with copies of a death certificate to shift accounts from joint ownership to your name only. In a divorce, changing ownership requires first determining how you’ll divide jointly owned assets (typically, through court orders and/or divorce agreements) and then securing any signatures and guarantees required by your financial institutions.
A word of caution: Pay attention to the conditions under which you divide assets and/or shift ownership. You could face significant tax burdens when splitting up highly appreciated assets or risk losses by selling in volatile markets.
Pension and retirement account assets have their own set of rules when it comes to shifting ownership from one spouse to the other, or splitting the assets.
Generally, upon the death of the account owner, retirement account assets pass directly to the designated beneficiary(ies). Even if your will makes provisions for your retirement assets in your will or trust, your beneficiary designations supersede them. That’s why it’s so important to keep your beneficiary designations up to date on all retirement accounts, such as 401(k)s, 403(b)s, and pension plans.
In a divorce settlement, retirement assets are often split up through a qualified domestic relations order (QDRO). A QDRO is a legal arrangement that allows an alternate payee (in this case the former spouse) to receive all or a portion of the former spouse’s retirement account balance and/or pension benefits.
You may take a cut in your income when you become suddenly single, so you may need to adjust your budget. Start by listing your essential expenses (housing, food, insurance, transportation, etc.) and your discretionary expenses (dinners out, vacations, clothing, etc.). Try to match reliable sources of income (salary, Social Security, pension, etc.) to your essential expenses and see where you might trim your discretionary spending.
If you’re near retirement or are already retired and fear an income shortfall, you might consider creating a guaranteed source of income by purchasing an income annuity.1 These products can turn a portion of your retirement savings into a source of reliable income that you can’t outlive.
Your insurance needs can change dramatically, so it’s important to take a careful look at all the different types of insurance that are available to see where you may need to adjust your coverage. Be sure to consider other ways to protect yourself financially, such as disability and long-term care insurance.
Life insurance. If you are the beneficiary on your deceased spouse or domestic partner’s life insurance policy, you will typically receive the proceeds tax-free. But if you are still caring for children, you may want to either purchase or increase your own life insurance coverage to make sure they will be protected in the event of your death.
If you divorce, consider (1) changing the beneficiary on your life insurance if it is currently your former spouse or domestic partner, and (2) purchasing or modifying your coverage to adequately protect your children if either you or your former spouse or domestic partner dies.
Health insurance. Even if your spouse or domestic partner carried your family’s health insurance coverage, you can continue to maintain it for a period of time through the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA allows you to continue coverage for up to 36 months so long as you pay the premiums, which can be up to 102% of the cost of the plan.
Because COBRA coverage can be expensive and doesn’t last indefinitely, you may want to check out other insurance options, whether through your own employer or through Covered California, the state’s affordable care marketplace.
Your credit can be among your most valuable assets—so protect it wisely. You may want to request a copy of your credit report to take inventory of all the accounts that are open in your name and/or jointly with your former spouse or domestic partner.
If you’re divorced, you’ll want to close joint credit accounts and shift to individual accounts so that your former spouse or domestic partner’s credit score won’t affect your credit rating. If you’re widowed, contact all three credit bureaus (Experian, Equifax, and TransUnion) to report that your spouse or domestic partner has passed away, to keep others from falsely establishing credit in his or her name.
Unfortunately, a surviving spouse or domestic partner is often responsible for paying the deceased’s credit card bills, whether these were joint or individual accounts. It’s always worth calling the credit card company, however, to negotiate better payment terms if necessary.
Here’s some good news: Even if you’re now on your own, Social Security recognizes that you were once part of a couple and offers benefits to both surviving and former spouses. Widows and ex-spouses may be entitled to 50% of their former spouse’s Social Security benefits, if those benefits would be greater than their own Social Security benefits.
As a surviving member of a married couple, you can receive full Social Security benefits at your full retirement age or reduced benefits as early as age 60. A disabled widow or widower can get benefits as early as age 50.2
If you’re divorced, you could be eligible for Social Security benefits, based on your former spouse’s record, if those benefits would be greater than your own retirement benefits. However, your former spouse must be eligible for Social Security benefits, and generally you must be unmarried and at least 62 years old.2 In addition, you must have been married for at least 10 years.
You can’t avoid the turmoil that comes with divorce or the death of a spouse or domestic partner, but recognizing how your personal finances might change could help you make thoughtful, rather than rushed, decisions and provide more solid financial ground as you transition to being single.
1 Guarantees are subject to the claims-paying ability of the issuing insurance company.
2 Social Security Administration
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