Going through a divorce is one of the most stressful events a person can go through, and while there are many challenges, the financial strain of living on less income can seem daunting. Maintaining two separate households is more expensive than one as the marital income used to support one household must now support two. Depending on your circumstances, support payments could continue for many years – funds you are relying on to be there. What happens, however, if the person paying support dies before the support obligation ends? One option to ensure that support payments continue until they are fully satisfied is through a life insurance policy.
Security for Spousal Support
If you are awarded spousal support, it is imperative to include a provision in your Judgment of Divorce or Settlement Agreement requiring the payor of support, your ex-spouse, to obtain or maintain a life insurance policy which names you as the beneficiary. This will not provide you with an additional award of support; rather, it is a safety net ensuring that you receive the full amount of support awarded to you even upon death of the payor. Typically, the Judgment of Divorce or Settlement Agreement will state that the payor is required to maintain a life insurance policy with a face-value sufficient to cover the total amount of spousal support owed, discounted for taxes and present value. A discount for taxes is considered because unlike spousal support which is taxable to the recipient, proceeds from a life insurance policy are not taxable to the recipient. And a discount for present value is considered comes into play because the surviving spouse is receiving the full amount of spousal support earlier than anticipated and money available “today” is worth more than the same amount in the future due to its potential earning capacity. If the face value of the policy is more than the support obligation owed, the payor can generally name a second beneficiary. Another option would be for the payor to decrease the face amount of the policy each year, to be lowered as the total amount of the obligation declines each year.
Security for Child Support
A life insurance policy can be used to secure child support as well, and the calculation is similar to the spousal support calculation above except for the tax discount as child support is not taxable to the recipient. Because child support is typically owed until each child turns 18 and is out of high school, you may prefer to receive monthly support payments rather than a lump sum payment – which also negates the need to discount for present value. To accomplish this, you need to included language in your Divorce Judgment or Settlement Agreement that addresses “timely payments” in accordance with your Agreement. One important, and often overlooked point: child support is calculated based upon, in part, the number of overnights each parent spends with the child. If the other parent passes, you now have the children all the time – yet your support does not reflect this reality. Accordingly, a provision should be included in the Divorce Judgment or Settlement Agreement to recalculate support at the payor’s income last income, with the number of overnights reapportioned. Other expenses can also be secured through a life insurance policy, including college tuition and other related expenses.
Contact me at (248) 647-7900 if you have questions regarding securing support obligations through a life insurance policy.