Role of Life Insurance in Divorce

While it may seem counter intuitive, insuring the life of an ex-spouse makes sense in many cases. When divorce involves children or a dependent spouse receiving alimony, one should consider the utility of having life insurance in place to make sure the financial requirements of the children or spouse are met? At the risk of stating the obvious, given the stakes, a term life policy on the obligor (person owing child support) is probably recommended. Especially when considering the comparatively low cost of term policies for most adults with minor children.

Obviously the need for life insurance doesn't end when a marriage does. Unfortunately, for whatever reason, life insurance is neglected when a marriage terminates. The consequences, especially when minor children are involved, can be devastating. Since the need for support continues at least, until the children reach the age of majority, a lump sum payment upon death can make certain of the continuation of support if an untimely death occurs. If the parties agree to it (or even if they don't, as you will see later) the final decree of divorce can place a requirement that the obligor keep a term or other life policy in place, for the benefit of the children.

Often, the cost of such protection is very affordable in light of the devastation which could occur should the obligor die prematurely. Most parents with minor children are still at an age, where purchasing insurance, especially term, is quite low. Even more cost efficient may be a declining term policy. Declining term is insurance in which the death benefit declines over the years, and is generally a lower cost premium. For example: A $250,000 term policy with a highly rated carrier costs a healthy 25 year old around $25 a month with coverage for 20 years. A 30 year old, who might only need coverage for 10 or 15 years, could get the same coverage.

When advising clients to implement a life insurance plan, you may want to make sure that the policy is not owned by the obligor. When the client (custodial parent) or possibly a grand parent owns the policy, they can insure no lapse in coverage should the obligor decide to stop paying premiums. The insurance company does not care who pays the premium and should the obligor stop paying, contempt and restitution proceedings may provide for reimbursement when appropriate. Insurance companies can provide notices to the owner when a policy is in danger of lapsing.

Other problems can occur when a policy lapses. The insured may no longer be insurable or may be in a higher rate class due to health or lifestyle issues. Again, having an ex-spouse or grandparent act as the owner can prevent these problems from arising, or at least give them the opportunity to decide whether or not keep the policy in force, rather than leaving it to the obligor/insure.

Given the high stakes involved, the nominal investment in a term life policy to cover loss of child support should be considered in all cases where minor children are involved. Of course, there may be times when life insurance is not an option due to disability or other factors but this would be the exception. Most grandparents would probably jump at the chance to make sure their grandchildren are taken care of, especially if they may wind up guardians some day, should both parents pass prematurely. While that doesn't happen often, as with most things, it does happen once in awhile.