A life and death matter divorcing couples should consider is life insurance.
Most couples get some form of life insurance during the marriage and, in most cases, they name their spouse as the beneficiary. It’s not unusual for divorcing couples to keep the existing life insurance in place after the divorce. But no matter what the method of divorce—litigation, mediation or collaborative divorce—both parties should re-examine life insurance coverage, particularly if children are involved.
The first consideration should be: do you have enough? If you are custodial parent, you certainly want to have life insurance for yourself. But what about your ex? If he/she is the one paying child support or alimony, will the life insurance be adequate for your child or children should he/she die? Will the death benefit of your existing policies be enough to replace the child support or alimony payments? What about college tuition, room and board?
In collaborative divorce and mediation, this topic is included as part of the negotiation. In litigation, the judge will order the non-custodial parent to carry a certain amount of life insurance to cover child support costs in the event of an untimely death. Although it is not unusual for the amount of life insurance to be somewhat less than the total child support payments until emancipation plus possible college payments, it behooves everyone to get out their calculators and estimate those costs when thinking about life insurance.
The second consideration should be: what is the term? If you have term life insurance (versus whole life or universal) it probably has a fixed term. During that term (for example, 15 years or 20 years) the annual premium is often fixed at a rate that you had previously determined was affordable. After the term expires, you can usually continue the insurance on your life but the premium sky rockets. If you are required to maintain life insurance for20 years but the term of your policy is only 15 years, you should consider either changing your policy now or finding alternative security for the period between 15 and 20 years.
The last consideration should be: who is designated as the beneficiary? While the issue of having life insurance isn’t usually a matter of contention, naming a beneficiary can be. While some couples are able to put aside differences for the sake of the children and keep the existing life insurance in place, many are not. So, instead of naming the ex-spouse as beneficiary in a life insurance policy, another option is to create a trust as beneficiary of the life insurance.
The purpose of the trust is to guarantee that the ownership of the life insurance proceeds are segregated from your ex spouse’s assets. The other purpose is to guarantee that a mutually agreeable third party can oversee the distribution of the funds consistent with your directions.
On the surface, a trust seems like a reasonable solution and it can be. It also, however, creates additional paperwork that can lengthen the process and increase costs. The trust will need to be prepared in advance and the terms negotiated.
The decision about whether to name your ex-spouse or a trust as beneficiary is negotiated as part of the divorce. Often the decision turns on the amount of the life insurance. If the death benefit is $500,000.00 or less, I find that parties just name the other spouse. When the insurance gets up to one million, the balance often favors spending the time and money to create a trust.
The one caveat I have for prospective clients is that you need to make the life insurance topic one of your priorities when negotiating a divorce. In a collaborative divorce, because financial experts are part of the process, issues like life insurance are part of the financial discussions. That’s not always the case in mediation. And, with litigation, it can be ordered by the court.
The reality of a divorce agreement, no matter the method by which it is reached, is that you have to make sure it’s an arrangement you can live with one year, five years, or even 10 years down the road. By making life insurance a priority in your negotiation, you prepare yourself and your children in the event that road takes an unexpected turn.