Life Insurance to Assure Payments to Former Spouse
Recently I wrote regarding using life insurance to assure payment of child support. Another scenario is life insurance to protect the alimony payment – the spouse being the beneficiary of the policy. This is a straight forward consideration flowing from payer/insured spouse to payee/beneficiary spouse. The insured wants less coverage and less premium, the payee/beneficiary spouse wants more coverage.
Premiums on a policy of life insurance on the alimony payer benefit the alimony payee. Payments to a third party on behalf of or for the benefit of a spouse or former spouse can qualify as alimony. Paying insurance premiums can qualify if the payer spouse is not obligated to pay under the insurance contract – because in that situation he or she is not simply paying his or her own expense. Generally, the owner of the policy is the person who is obligated to pay the premiums. So in order for premiums on the life of the insured/alimony payer’s life paid by the insured/alimony payer to be deductible as alimony, the alimony payee must be the owner of the life insurance policy. The parties’ Agreement should require the insured/alimony payer to pay the premiums on the payee’s behalf and the parties’ Agreement should state that such payments are alimony.
Another situation where life insurance can be appropriate is to replace a survivor annuity if it is unavailable or available only on undesirable terms. A traditional defined benefit pension pays a lifetime annuity to the retiree. Federal law generally requires married persons to elect what is known as a joint and survivor annuity payment option, unless the employee’s spouse agrees otherwise in writing. In divorce, the parties can agree to a joint and survivor annuity or the court can order it. Under this option, if the non-employee spouse survives the employee spouse, the pension payer continues the annuity payments at a reduced rate to the non-employee spouse for his or her life.
The initial payment (during the joint lives) under a single life annuity payment option is higher than the initial payment under the joint and survivor annuity option. Depending on the amount of that payment reduction, it may make financial sense to elect the single life annuity and buy life insurance on the employee’s life to protect the income stream for the non-employee in the event that he or she is the survivor. The advice of an experienced life insurance professional can be very useful in doing this analysis.