October 12, 2020

Life Insurance and Divorce

It is no doubt distasteful to contemplate paying for life insurance to benefit a (cheating soon to be) former spouse. Nevertheless, in a contested case, a court might require the spouse paying alimony or child support to maintain life insurance to substitute for the lost income if the payor spouse dies.  Because of that risk or just because it makes sense, a negotiated divorce agreement might call for life insurance for that purpose.  Life insurance might also be part of the settlement to pay for college or to protect future needs of adult children with special needs. 

A policy, with cash value, could be cashed-in or a policy loan may be taken to make cash available.  The cash can then be used as part of a property settlement to offset other assets that a spouse wishes to retain, to pay off debt, or provide a down payment on a new home so that the divorced parents can live close to the children.  Of course, care needs to be taken that cashing in a policy doesn’t result in loss of insurance where the insured is no longer insurable at reasonable rates. 

Arrangements using life insurance need to be done with care and be clearly detailed in the divorce agreement.  For example, if life insurance is to secure alimony, it’s important that there be arrangements to make sure the recipient spouse doesn’t receive a windfall of a $100,000 death benefit when the alimony payment over the balance of the term is $10,000.  If there is concern that a party might, even in the face of a court order, allow a policy to lapse, perhaps ownership of the policy might be transferred and the beneficiary spouse given control over premium payments.  Borrowing against the policy needs to be addressed so that the beneficiary’s expected proceeds aren’t diminished.

Early planning with your lawyer will help you avoid pitfalls and plan for effective use of life insurance in the context of your situation and within the constraints of the law.   Remember that the confidentiality of what you and your lawyer discuss is legally protected.  While an insurance agent may be a trusted advisor, the agent, also having a relationship with the spouse, may feel obligated to notify the spouse about a discussion or policy change or may do that unintentionally.  Moreover, the agent may even be compelled to disclose communications with you in court. 

Thank you to RJ Media Group for first publishing this article in the October 1, 2020 edition of The Cheshire Citizen.

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