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How Life Insurance Can Help Protect You & Your Child in a Divorce

How Life Insurance Can Help Protect You & Your Child in a DivorceWhen spouses divorce, most of the family issues are resolved either at the time of the divorce or shortly thereafter. The judge issues a divorce decree, which grants the spouses the right to start new relationships and to remarry if they choose. The marital property is divided in accordance with the equitable distribution agreement and order. Alimony is set (if applicable), as is child support and child custody, though these last three issues may be subject to modifications over time, based on the best interests of the children and the financial concerns of the parents.

One way to secure child support and alimony payments in the face of those financial concerns is to purchase life insurance. This can ensure that, in the event of your death, there is money set aside for your children. Because life insurance plans are not necessarily divided as part of a divorce, that money should remain safe and secure.

How much life insurance do you need to purchase to secure your child support obligations?

Since a life insurance policy would be put in place to ensure that there is enough support for your child, you should buy a policy that reflects how much support you would have paid over the remaining years that it is due. Typically, this means how much you would pay until the child turns 18, plus any other considerations like higher education.

If you are the spouse who receives child support, purchasing life insurance is still a good idea for all the same reasons.

The amount of insurance required should be evaluated yearly as the amount of child support due decreases as your child ages.

How life insurance provides security for alimony payments

The spouse who is paying alimony should also consider buying life insurance to cover the alimony payments that are due. The amount of life insurance needed will differ depending on the type of alimony. While the duty to pay alimony generally ends when either spouse dies, a life insurance plan is a good way to protect a less financially secure spouse – especially if you have been ordered to pay reimbursement, periodic, or rehabilitative alimony, or separate maintenance and support.

What if you already have a life insurance plan?

If you and your spouse purchased life insurance while married, you will need to address that plan in your separation agreement. Specifically, you will have to decide whether or not the paying parent/spouse can change the beneficiaries of the life insurance plan before the child reaches the age of majority, or if a spouse remarries. This is important because if your life insurance policy is part of the separation agreement and divorce decree, then the receiving spouse must use the payout for the purposes outlined in those agreements.

Important decisions regarding life insurance to secure support payments

Whether you already have a policy or plan on purchasing one, there are come important decisions ahead of you:

  • Who is your beneficiary? You may want to leave your money directly to your child, but if your child is a minor, he or she may not be able to access that money for years. Further, if your policy is designed to cover child support, then the recipient may need to be your former spouse. You can always place your policy in trust, if you want to ensure only your child can access it, which can be handled by an executor.
  • What if there’s a windfall? A windfall is exactly what is sounds like: a large, unexpected amount of money. Windfalls can be created when a payor spouse has only a small obligation for support, but the policy pays out significantly more. This extra money can be put toward the child’s college education, medical needs, or other needs such as a down payment on a child’s home when he/she becomes an adult. It can also be designated for other beneficiaries. This needs to be addressed in the separation agreement (if the policy was bought pre-divorce) or in the estate plan (if the policy was purchased post-divorce). You can also buy decreasing term insurance to eliminate this issue.
  • What if you need to cash out the policy? If you are the payor spouse/parent and your former spouse/coparent passes away, then the burden of alimony will be lifted – but child support will fall entirely to you. You can leave the policy as it is, cancel your policy (which may lead to additional fees), or take cash-value withdrawals from the policy, which could be subject to taxes. You could also sell the policy, but again, there will be tax considerations to review before you do.

A few additional life insurance considerations

The amount of life insurance is generally discounted to a present-day value. Essentially, the life insurance proceeds should pay enough that if the supported spouse invests the proceeds in an interest-bearing account, CDs, or other income-producing assets; the proceeds will be enough to pay for the child support or alimony as those payments become due. If, for example, you multiply the monthly child support due by the number of months until your child turns 18, then the parent receiving those funds will receive a windfall because they can invest the money while they’re raising their child.

The health issues of the payor and payee spouse should be discussed. If either spouse is not reasonably likely to live until their child turns 18 or if the payor spouse is likely to die before the supported spouse, the amount of life insurance needed may need to be adjusted. Alternatively, other funding arrangements may need to be considered.

Holland Law LLC provides experienced family law advice. We focus on all relevant issues including your children, your priorities, the practicalities of selling or transferring assets, and the ability to fund financial obligations that continue past the date of the divorce. We represent spouses in York, Lancaster, and Chester Counties. To make an appointment with an experienced divorce lawyer in our Fort Mill or Rock Hill office, call us at 803-219-2630, or reach out through our contact page.