An Expert’s Advice on Insuring Child Support & Alimony

People typically know that the cash value of a Whole Life insurance policy can be a marital asset and subject to division on divorce. But term life insurance and disability insurance are often overlooked in divorce negotiations since they accrue no cash value.  That’s a big mistake, especially when there is child support or alimony at stake.

When a divorcing couple has children, especially young children, one parent is likely to have a child support obligation for many years ahead.  If the payor becomes disabled or dies, the child support payments shrink or vanish – but the need for it does not.  Similarly, alimony payments cease upon death and possibly, long before alimony is satisfied.

In my mediation practice, I turn to Joseph Sperling (J.S.), insurance expert in Maryland, to make sure that I ask the right questions to help divorcing spouses protect the crucial support they need.

Here are the primary considerations:

What is the amount needed?

J.S.: Aim for the annual amount of child support and/or spousal support multiplied by the number of years the obligation will continue. With disability insurance, the carrier will set the maximum monthly benefit based on occupation and income.

What type of policy?

J.S.: Term will be the lowest cost for obligations that are for 15 to 20 years.  If the divorce involves payments that will be reduced over time, there are several options. If the insurance carrier will do so, the death benefit can be reduced. Not all carriers will agree to this. An alternative is to set up an irrevocable life insurance trust (ILIT) to own the policy and be the beneficiary.  As the obligation is reduced, the ILIT can allocate the death benefit to other intended beneficiaries. A third alternative is to use staggered smaller term policies to meet the declining obligation.

Who should be the designated beneficiary?  

J.S.: Should it be the other parent, a designated custodian, or a trust for the benefit of the children? There are advantages and disadvantages to each.  Discuss the level of trust between you and your spouse with your mediator to decide which way to go.

Who should own the policy?

J.S.: Making the beneficiary the owner of the policy is a good way to prevent the insured from changing the beneficiary. Be careful to avoid the unholy trinity: Do not have three separate parties as owner, insured, and beneficiary. The proceeds will be subject to gift tax and may create a potential gift tax issue for the parties.

Who will pay the premiums?

J.S.: There are instances where it may make sense for either the insured or the beneficiary to pay the premium. No matter which party pays, seek duplicate notices. Call the carrier to verify receipt of payments.

Should a stay-at-home parent be insured?  

J.S.: It’s a good idea. Consider the cost of hiring replacement(s) to perform all of the varied functions (housekeeping, carpool, shopping, managing the household, child care, etc.)

Joe encourages folks to always get information from an experienced insurance professional rather than from the websites, which can be misleading.