While alimony and child support obligations end upon the death of the payor, these obligations must be secured in the event of death. Generally, they are secured through life insurance.
If we are dealing with alimony, in order to determine the appropriate amount of insurance, we calculate what the total amount of alimony should be (i.e., $1,000 a month for seven years equals $84,000). Since alimony is taxable to the recipient, we deduct an adequate amount for taxes and then determine its present value. In this example, the amount due after deducting taxes and determining present value is approximately $54,000. This is the amount of life insurance which should be in existence on the payor’s life, naming the payee as beneficiary.
This calculation becomes a little more challenging when the obligation is for permanent alimony. However, we can look at life expectancy tables to determine the number of years alimony may be paid, or key into a change of circumstance event, such as retirement, to approximate the amount of insurance that should cover the obligation.
In dealing with child support, we do a similar calculation by determining how many years child support should be paid until the child is emancipated. Since child support is not tax deductible to the payor or includable in income to the payee, we do not consider taxes. We would still, however, determine present value.
There are times when life insurance may not be an option as a means of securing support obligations such as when a payor has a pre-existing condition or is up in age and may not be able to obtain insurance–or, if obtainable, the cost may be prohibitive.
In these instances, we must look to other alternatives to secure support obligations. One way of doing this is to place a lien against the payor’s estate. This can be done through a judgment allowing same. Another avenue may be through a note and mortgage on real estate. Yet, another method is by contract or agreement obligating the payor to name the payee as beneficiary under his/her Will or Trust.
Whichever method is chosen, it is important to secure support obligations in the event of the death of the payor before those obligations would have ceased.