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If you are getting a divorce, you have a slew of financial concerns to consider. Alimony, child support, mortgage payments and paying for your children's college education are among the obligations to be decided.
Divorce also has serious life insurance implications. Whether you have life insurance, or find that you have to buy a policy because of your new financial obligations such as alimony and child support, life insurance should not be overlooked in divorce proceedings.
| If you were to die tomorrow, your ex-spouse would be left without the alimony and child support that was part of your agreement. |
Many married couples buy life insurance to cover existing and anticipated debts and financial obligations in case one of them dies prematurely. For example, if your spouse dies tomorrow, the death benefit from the life insurance policy could help pay off a mortgage or send your children to college.
As part of a divorce settlement, the spouse who will be paying alimony and child support has a moral obligation to buy a life insurance policy, says Marna Tucker, a senior partner with Feldesman Tucker Leifer Fidell LLP, family law specialists in Washington, D.C. That's because if you were to die tomorrow, your ex-spouse would be left without the alimony and child support that was part of your agreement. "Life insurance secures obligations that one party may have to another after death," Tucker says.
Norse Blazzard, an insurance law attorney with Blazzard & Hasenauer, P.C. in Pompano Beach, Fla., warns that an ex-spouse who receives alimony or child support should beware. The former spouse at first could agree to buy the insurance, then change the beneficiary or stop paying premiums and lapse the policy. Blazzard suggests including a stipulation in the divorce agreement requiring the ex-spouse to pay the premiums to keep the insurance in force and not change the beneficiary. If the ex-spouse violates the agreement, he or she could be found in contempt of court and subject to fines or other penalties. Better still, the ex-spouse should be the owner of the policy and thus control the naming of themselves as the beneficiary.
Who gets the cash value?
Existing whole life insurance policies can be particularly difficult to split up as assets in a divorce because they contain a cash value component that will grow for as long as the policy is in force.
Tucker says both parties may agree to split the life insurance cash value or allocate the funds in whatever percentage they choose (such as 50/50, 60/40 or 70/30) for as long as the policy is kept in force. Tucker has heard about some cases in which one person gets 50 percent of the cash value at the time of the divorce and the ex-spouse gets 50 percent as well as any cash that accumulates in the future.
If you and your spouse cannot agree on how the assets should be split up, a judge in family court will decide for you. The outcome is determined by the state you live in. In states such as Arizona, California, Louisiana and Nevada, for example, the cash value in the policy would be divided on a 50/50 basis because it is viewed as "community property," Tucker says. In other states, assets in a divorce case are subject to "equitable distribution," meaning a judge may divvy up the cash value any way he or she deems appropriate. |
Blazzard also recommends the ex-spouse making alimony or child support payments provide confirmation annually to his or her ex-spouse that the insurance policy is still in force and the ex-spouse is still listed as the beneficiary. If it's a cash value policy (such as whole life insurance), Blazzard suggests you get any information about recent transactions in the policy that could impact the death benefit, including loans or partial withdrawals. This requirement can be part
of the divorce agreement.
Tucker says you can stipulate in your divorce agreement that if your ex-spouse dies and the life insurance policy is not in force or the beneficiary has been changed, you would be entitled to part of his or her estate equal in value to the death benefit.
If you are wondering what type of insurance you should buy to cover your alimony or child support obligations, most experts suggest you buy term life insurance instead
of whole life or any other policy that accumulates cash value. That's because in divorce cases, a spouse is concerned with pure insurance protection like that offered by term life and not likely not interested in paying for a component that builds cash value, Tucker says.
Premiums for term life insurance are also less expensive than whole life insurance premiums — an advantage that could make it more palatable to buy insurance that would compensate your ex-spouse. That may be key, because a person who is paying alimony and child support might not be required by a court to have a life insurance policy.
Tucker says many people who pay child support opt for decreasing term insurance, a type of policy in which your death benefit gets smaller at the point your children are getting older and less financially dependent.
Tucker says although some divorce agreements require a spouse to pay alimony until one of them dies, term life insurance is still probably a better option because most divorced couples have debts or financial concerns that will disappear eventually. For example, by the time you reach retirement age, it's unlikely that your ex-spouse will have to worry about financing a child's college education or paying off a mortgage.
| "By having two trustees, you have to figure at least one of them won't be [spending] the funds." |
If you are the spouse who is receiving alimony and child support payments, and you have an existing policy listing your ex-spouse as your beneficiary, you may still opt to keep the policy in force. If you were to die and your ex-spouse gained custody of the children, he or she would then take on the financial burden of raising the children alone.
If your ex-spouse has remarried and has two household incomes, or makes enough money to raise the children comfortably without alimony, you might decide to contact your insurance company to change your beneficiary.
Many people name their children as the beneficiaries. If your children are under the age of 18, you likely will have to set up a family trust in which a trustee is named to oversee the funds until the children reach 18.
A trustee may be someone you know, such as a friend or relative. It could also be a professional or an institution, such as a lawyer or a bank. Tucker says you may name your former spouse as the trustee. If he or she were to spend the life insurance money in any way that was in conflict with the children's best interest, he or she could be subject to court penalties.
If you're considering using a bank or lawyer as a trustee, make sure to compare the fees charged by each, says Laurel Bellows, a partner with Bellows & Bellows P.C. in Chicago. Bellows says there are two important aspects to consider when choosing a trustee: the relationship you have with the person, particularly as family conflicts often arise in regard to trusts, and the fees charged. Bank fees are typically based on the type of trust, the previous relationship with the bank and the trust's worth, with fees typically ranging from 1 to 1.25 percent. Lawyers are usually able to negotiate their fees on a case-by-case basis, says Bellows.
Insurers also may allow spouses who pay child support to name their ex-spouse and children as co-beneficiaries on a policy. You still must designate a trustee for your children if they are named and are under 18. If you list your ex-spouse as trustee, he or she will be required to manage the money in the children's best interests.
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