Life insurance in divorce and disability insurance in divorce will protect your lifestyle after divorce
What happens if you are counting on child support and/or alimony to cover your bills and your payer ex-spouse dies? What will you do? That is why insurance in divorce will protect your lifestyle after divorce and why it’s important to include in the divorce decree thay the paying ex-spouse have life insurance in divorce and disability insurance in divorce.
Life insurance in divorce
Most attorneys are aware of the need for life insurance and it’s not uncommon for a divorce decree to require life insurance (usually term insurance) on the life of the spouse paying child support, alimony or other settlement obligations. If the payer is insurable, new insurance, usually term, can be purchased. Because the obligations will reduce over time, an option is to ascertain through the agent in advance those insurance carriers willing to allow reductions in coverage under the terms of the settlement agreement. Another approach is to layer the policies by staggering terms of smaller policies that meet the requirements of the settlement agreement.
It gets more complicated when the payer spouse already has insurance in force prior to divorce and is no longer insurable or a new policy would be too costly. The ownership of the policy can and should be transferred to the payee spouse so he or she can be notified if premiums aren’t being paid and/or pay the premiums himself or herself. A problem arises when the face amount on the policy exceeds the present value of the payment stream. The owner (the payee spouse) should not get a windfall should the ex-spouse die. However, the owner of the policy has the power to change beneficiary designations. Existing policies cannot be split, and unfortunately beneficiary designations cannot be filled out to pre-designate a sliding scale of percentage payouts on a year by year basis. A new designation would have to be submitted yearly to change the beneficiaries. Who to trust? The situation is not ideal by any means. The best solution may be to spell out in the settlement agreement that the beneficiary designation must be changed yearly to reflect the declining present value of the payment stream and that proof of the new beneficiary designation must be provided.
Disability insurance in divorce
But what happens if the payer spouse becomes disabled? A person is 4 times more likely to become disabled than they are to die. Often this possibility is overlooked in divorce. While people in white collar and professional/technical jobs may have disability income insurance through their work or carry personal disability income insurance, it only insures a portion of their income, typically 40% to 60%. Then it becomes difficult to impossible for the payer spouse to pay his or her own bills, let alone alimony and/or child support, especially in the case of a long term disability. If the payer is uninsured and doesn’t qualify for workers’ comp, Social Security is the only benefit the payer has access to. Social Security benefits are small (less than 60% of income) and Social Security denies 70% of their claims.
What often plays out is that the payer petitions the court to reduce the alimony and child support payments because of the disability. Unfortunately the court process is slow and attorney’s fees must be paid in addition to the ongoing payments while going through the court process. Another possibility is that the payer has to liquidate other assets to pay the stipulated alimony and/or child support payments. The payee spouse runs the risk of having alimony and/or child support stop completely (even though the judgment states the payments must be made) because the payer simply doesn’t have the money to pay them while disabled. Both parties suffer financially.
Divorce Disability Insurance
There is Divorce Disability Insurance (Divorce DI) now on the market to protect your lifestyle after divorce. The DI policy can be written to cover child support, alimony, tuition or any other items the payer is obligated to pay. It is surprisingly affordable and it’s written in five-year increments. The premiums actually go down during that 5 year period because, for instance, as the alimony payments are paid, the obligation is reduced. Every 5 years the policy is re-written, but because settlement obligations have lowered, the premiums are usually lower.
As part of my divorce practice, I maintained my NC life and health insurance license so I could provide divorcing clients with this important lifestyle protection. Please call me at (910) 622-7180 to be certain settlement obligations will continue to be paid in full in the case of death or disability..
