Life Insurance In Divorce Settlements
Divorcing spouses and parents have varied life insurance needs. Whenever one or more persons are financially dependent on another’s earnings there is what the life insurance industry refers to as an insurable interest. In families of two married parents with young children the primary wage earner often has life insurance coverage equal to several years earning. The benefit to the financially dependent spouse and the children is obvious. The benefit to the insured party is the peace of mind that comes from knowing your loved ones are provided for in all events. Often both spouse carry life insurance coverage because both are employed or, if one is not employed, the stay at home spouse is providing services that would have to be purchased in the event of her, or his, untimely death.
Upon divorce in families with children there is still the same basic economic need for life insurance coverage to protect the child support payments. The children generally would be the beneficiaries of the policy – directly or through a trust. The insured still benefits from knowing his loved ones will be provided for. Life insurance proceeds paid during the insured’s children’s minority would be needed and would benefit the insured’s children just as they would if he or she died while the children were minors and the insured was married to the other parent at death.
But the dynamic is different in divorce. The insured views the insurance coverage as benefitting the future ex-spouse. Often there is hard bargaining around how much insurance coverage there will be, how long it will be in place or how quickly it decreases, and whether the spouse can be the trustee of the trust to which the insurance proceeds are paid.
The decision to pay money to an insurance company now so that the insurance company will pay others after you are dead is usually undertaken with some ambivalence.
If you have minor children, you generally still need life insurance coverage post-divorce but it is a prospect that many people find even more distasteful at that time. Add to this, the fact that the divorce court generally cannot order a party to obtain or continue life insurance. (In Virginia, the court can order a party to continue existing life insurance coverage and designate children as beneficiaries if the party has a duty of support to such minor children. Va. Code Sec. 20-108. D) So the party who is proponent of the life insurance coverage, usually the economically dependent spouse, will often have to make a concession on some other issue to get the desired life insurance coverage. In many cases, since that concession would means less money now to the economically dependent spouse, the concession is not made and the life insurance is not agreed to. As a result, many divorced fathers and mother have less life insurance coverage than a married parent with similar income, net worth and family responsibilities would have. One more risk for children of divorce.
When we represent the economically dependant spouse, or in case where there are two significant income earners, we look carefully at apparent life insurance needs and counsel clients to seek an agreement requiring adequate life insurance coverage. When we represent the higher earner, if there are minor children, we counsel our client to carefully examine the life insurance need and think it through before bargaining for lower coverage.
It is always necessary from the insured’s viewpoint for the Agreement to provide for reduced coverage as the future financial obligation decreases over time. This is especially important if the life insurance policy does not lock in level premiums per unit of coverage for the duration of the obligation. It is best to consult with an experienced life insurance agent with a highly rated insurance company while the marital settlement agreement is being negotiated to determine the availability and cost of coverage.
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.