They say that the devil is in the details, and one of those details in a divorce is life insurance. Once all terms of an agreement are reached, the issue of life insurance has to be addressed. When cases do not settle, and a judge has to decide the issues of alimony and child support, the law governing support allows the judge to order life insurance to secure the obligation.
Typically, life insurance is needed in order to make sure a parent has sufficient support for a child if child support is ended due to the other parent’s death. In the case of spousal support, life insurance is similarly needed in order to protect against that untimely death of the payer spouse.
In the case of insurance to protect children there are several issues that arise. First, calculating the amount of support necessary considers several factors. First, the amount of child support and related expenses the parents are expected to pay until the child is anticipated to graduate high school. Simply looking at the child support may not adequately protect the child. How much in work related childcare may there be over the years? How much in unreimbursed medical expenses may there be? Also, is the child involved in any activities that are particularly expensive? Take the hockey prodigy for an example. That activity can run $10,000 or more per year!
The amount of years the child will need support is also a factor. A three-year-old will need more life insurance than a 12-year-old. Then, college has to be factored in as well. What is an expected cost for a four-year school when the child will be entering college? These are all issues that have to be taken into consideration and be discussed.
Who gets the insurance? In the vast majority of cases, it is the surviving parent who is named as a trustee on behalf of the child or children. Oftentimes this is a bitter pill for a parent to swallow and that parent may want to have either an alternative trustee or co-trustee named.
Another issue to consider is making sure the designation of a beneficiary on the life insurance forms is appropriate and makes sense. Sometimes individuals simply put their children as beneficiaries and if the child or children are minors, this can create some problems. Making sure you and your attorney communicate with the life insurance company is key.
As the children grow older, the need for as much life insurance decreases. Many agreements have a provision that allows the insured to decrease the face amount of the policy as time goes on.
Similarly, alimony is most often secured by life insurance. Depending on how much and how long a payer is paying alimony, the life insurance amount will be calculated. When determining how much is needed to be obtained, advisors will often utilize a present value as opposed to simply calculating the amount times the number of years. This is to make sure the obligation does not result in an unfair windfall to one person. For example, if a former spouse is to receive 10 years of $100,000 per year, it might initially make sense to have $1M in coverage. However, if the payer dies in year 2, this will result in the receiving spouse getting more money than he or she would have likely received during the alimony term due to the ability to invest the insurance.
Another issue that has to be considered is the age and health of the person paying support at the time the obligations are set. If there are health issues involved with the person paying support, the cost of life insurance may be prohibitive. Settlements and judgments have to take into consideration all relevant factors and cannot be unduly burdensome to one party. Looking at other security for support obligations may be necessary. This may be the purchase of an annuity, funding 529 plans, or setting aside other assets
It is important to make sure you have all the information necessary to either seek or respond to an effort to secure support obligations. Coordination with your attorney and insurance agent is key.