When you are getting married, you never expect to come up in court one day and talk about divorce settlement but with the high failure rate of marriages in this country— 50% percent of first marriages, 67% of second, and 73% of third marriages ending in divorce—these sobering statistics point to the need for clear-cut divorce negotiations.
Part of the conversation in reaching an equitable agreement to split up should include life insurance. Yes, that’s right, life insurance. Why? because it’s a risk management tool to protect the financial obligation that an ex-spouse and children are legally owed according to the terms of the divorce settlement. If the agreement package to divide property and assets involves child support or alimony, life insurance acts as a safety net to cover that obligation.
The dependent spouse should ask the court that the divorced spouse, who is responsible for the financial obligation, be required to maintain a life insurance policy on themselves to guarantee that the children will be financially protected should the supporting parent die before the obligation comes to an end.
You will have to work out the numbers to determine the amount of coverage for that policy and how long it should be kept in force. For instance, if it is specifically intended to cover the long-term costs of child support the policy can be terminated when the dependent child reaches the age of majority, but the parent can also decide to extend the policy until later in adulthood. If the court mandates that life insurance coverage should guarantee the total value of the alimony package, then as long as the alimony payments are required, the policy will be continued.
Divorce Settlement Negotiation
When negotiating your divorce settlement, it is important to choose who will actually own the policy on the supporting spouse. Can you trust your ex to keep up the policy payments if he/she is the policy owner? This is very important because the designated spouse will be the owner of the policy and will have the contractual right to name (and change) the beneficiaries. One way to ensure that the policy becomes a part of the agreement in the divorce settlement is to name the dependent/custodial parent as the owner of the policy.
In other words, YOU can buy the policy on the supporting spouse as the “insured party” because you have what is called an “insurable interest” in that person and would suffer financially from his death. The ‘ex’ has to be cooperative in taking the medical exam, or you might want to look into no-medical exam policies that are available to people who qualify. It’s up to you if you request that the supporting “insured” spouse pay for that policy outright, or reimburse you for the cost of the premiums you make. It has to be clear and in writing as part of the settlement.
And just like determining how to divide all the marital assets, agreeing on the right amount of life insurance to cover the potential loss of future alimony or child support funds requires careful planning and negotiations.
How Much Insurance Do You Need?
The amount of insurance protection you need will require you to calculate the total value of the term of the agreement. In other words, how much would you need to cover twenty years of alimony payments, to pay off the mortgage, and to pay for the cost of educating your children through college? The last thing you want is to have your ‘ex’ be underinsured because the death benefit, or the amount you will receive at the death of the insured spouse, will not be sufficient to meet these needs.
Failure to Pay Premiums Will Cancel The Policy
A life insurance policy is only as good as its premium payments. If payment is not made on time— be it monthly, quarterly, or annually— that policy will be cancelled. A lapsed policy will mean that your ex will have to reapply for coverage at the current age, and health status, meaning the premiums could become more expensive. In order to protect yourself from getting blindsided, your attorney can demand that your name be included in the policy as a key person to be notified if the premiums go unpaid. It is in the best interest of the insurance company to acquiesce to that request since they want to make sure payments continue to keep the policy in force.
The Policy Owner Can Change Beneficiaries
As we just said, the policy owner controls the beneficiary designations and has a contractual right to change them at any time, even if the courts have ordered that the policy name you (the ex spouse) as the beneficiary. The only way to give you control over that policy is to make you the policy owner. Your ex, who would be financially responsible to you and your children, would be named as the insured person in the policy and the one who pays the premium.
There are ways you can avoid some of these issues with provisions in the divorce settlement stating that if there is a change in beneficiary, or if the policy is cancelled for non-payment, you or your children would be allowed to receive a portion of your ex-husband’s estate equal to the value of the death benefit. This is complicated and means future litigation so it is worthy of discussion with your attorney.
The only other thing you need to know about the life insurance policy you are requesting as part of your divorce settlement is the type of policy you want. The most common and affordable type is term life insurance, which simply pays out a cash death benefit to the beneficiary if the insured party dies during the length of the policy (generally 5-30 years). Permanent or Whole Life Insurance is more of an investment vehicle, growing and building up cash value. Your attorney will have to advise you and the courts may only be inclined to provide you with a term life policy, but it’s all up for discussion and negotiation.
There is nothing more emotionally charged than a break-up. Add money to the equation and divorce settlement talks become potentially explosive. A civilized negotiation with clear goals assures a clean break, and a clean slate to start your new life. The rationale for life insurance protection to guarantee financial security should be approached with logic, and an eye toward the well being of the family.