Key insurance decisions for the suddenly single

A pen and a pair of glasses on a health insurance policy claim form.
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(MoneyWatch) A key lesson for anyone who becomes suddenly become single, whether through divorce or widowhood: Avoid making financial decisions during an emotional time.

Good financial decisions require clear and objective thinking. This is especially true when it comes to making choices about insurance. An individual's insurance needs can change dramatically when they become single again. For this reason, it's important to take a thorough and objective look at the different types of insurance you have, what you need and how you may want to adjust your coverage.

Life insurance

Beneficiaries of their deceased spouses' life insurance typically receive the death benefit proceeds tax free. One urgent question is whether to leave the death benefit on deposit with the insurance company. The advantages of this option are that the insurance company's "settlement account" will typically earn a higher interest rate than what you will earn at your local bank. The insurer will also issue a checkbook for the surviving spouse to draw on the account as often as necessary.

The downside is that since the cash is held in the insurance company's general account (in other words, commingled the firm's other assets), then this money is not protected by typical forms of deposit insurance, such as FDIC insurance. So if the insurance company goes out of business, you could lose some of your money.

If you still have children who are financially dependent on you, it's advisable to either purchase or increase your life insurance coverage. But remember that this need may diminish when the children are self-supporting adults, so consider term insurance as an option for this part of your insurance portfolio.

If you become single due to divorce, you'll want to think about changing your beneficiary designation on life insurance policies. If your divorce agreement requires it, you may also have to purchase life insurance to provide funds for support of any minor children.

Continuing health insurance

Surviving or divorced spouses are legally allowed to continue their spouses' health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act, or COBRA. If you lose health insurance due to death, divorce or other causes, you can elect to continue coverage for up to 36 months as long as you continue to pay the premiums. Since this is expensive and temporary, you may want to shop around for a lower-cost individual health plan, such as a high-deductible policy.

Other forms of insurance you may want to consider are disability insurance and long-term care insurance. Disability insurance pays monthly cash benefits if you become disabled and cannot work. Long-term care insurance pays a monthly or daily amount if you require care for a longer period of time in a nursing home of similar arrangement.

Having some form of cash flow benefit paid from a policy if you become ill or injured is important -- especially if you are single and the sole earner supporting a household and dependents. Of the two forms of insurance just mentioned, disability insurance is the more important.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.