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Why Is Life Insurance Needed in a Divorce?

Life Insurance and Divorce

While few people may think about life insurance when considering a New Jersey divorce, it can be an important part of the details of a settlement agreement or the divorce decree. Life insurance may be addressed as part of negotiations with your family lawyers, and it may also be ordered by New Jersey family court judges, especially in cases that go to litigation. When a judge rules on matters of alimony and child support, they may order life insurance to be obtained in order to ensure the obligation is secured in case of one party’s untimely or unexpected death.

Child Support and Life Insurance

Parents are generally advised to purchase a life insurance policy when they have children, in order to provide for their children in case of their death and the loss of their expected income. However, the considerations are intensified during a divorce, and the life insurance policy required may be linked to expected child support payments. Many marital settlement agreements and divorce documents also anticipate shared expenses for the children outside of the monthly child support payment.

A divorce settlement may envision payment for college tuition, costs for extracurricular activities, expenses for extra childcare, medical fees and other expenses. The age of the children will also be taken into account. For example, parents of a 17-year-old will be expected to need a lower amount of life insurance than the parents of a 2-year-old. Parents may discuss these issues with their divorce lawyers when negotiating their settlement. Some policies may allow the policy-holder to decrease the amount of insurance over time as the child ages and the amount of insurance needed is no longer the same.

Payment for the insurance policy may also be handled as part of the divorce negotiations that the couple and their divorce attorneys conduct. Because this kind of policy is insurance for the future financial maintenance of the status quo fixed in the divorce settlement, financial responsibility for the policy may be assigned to one parent or shared between the parents. The settlement may also require the surviving parent to be named as the trustee for the policy on behalf of the children or designate an additional trustee.

Each parent and their divorce lawyer should ensure that they communicate clearly with their insurer when setting up this type of life insurance policy. Beneficiary designations are particularly important, as naming the minor children can lead to complications. Designating the children as beneficiaries and the other parent as a trustee may minimize the likelihood of future complications. By working with an experienced family law attorney, you can obtain the needed life insurance policy that meets the specifications and expectations in the settlement agreement or required by the judge.

Alimony and Life Insurance

If alimony is also part of a divorce settlement, it may also be secured by a life insurance policy. Both parties and their family lawyers may negotiate how the total value of alimony is to be calculated when purchasing the life insurance policy, as well as a gradual reduction in the value of the policy over time, as the recipient receives the alimony ordered by the court. These calculations may vary depending on whether the recipient will receive lifetime alimony or a time-limited award.

As with child support, a family court judge may order that life insurance be purchased in order to secure an alimony obligation.

When Life Insurance Is Not Available

Of course, this mechanism works best with relatively young and healthy people deciding to divorce. Costs of life insurance may rise significantly with the age or poor health of the person responsible for paying support. The requirement for a life insurance policy should not impose an overwhelming burden on either party that might nearly outweigh the cost of support itself. Others may pledge a different asset as security or add language into their agreement that there is a primary lien on their estate.

As a result, people may work with their divorce attorneys to determine other options to secure the obligation. For example, one or both parties may purchase an annuity, fund a 529 plan to support the children’s education or set aside a portion of other assets in savings or investments to cover the obligation if necessary. Estate planning may also be a part of determining this type of security for an obligation when life insurance is too great of a burden.

Challenges With Life Insurance

In some cases, people may prefer to seek a lump sum rather than ongoing alimony payments or an accelerated payment option. In other cases, the asset division process may seem to favor one spouse, but the result will be that this party does not receive the alimony that they would ordinarily expect to be awarded. These decisions can eliminate the need for a life insurance policy when alimony is at issue.

On the other hand, settlement agreement provisions for child support will typically require both parents to obtain life insurance.

There are other challenges that may arise, particularly if the party with the obligation fails to maintain their annual life insurance premiums. The policy may lapse or become defunct as a result. Some agreements and orders may require annual notification about the status of the policy or include provisions allowing the life insurance issue to be raised in court. In many cases, the named recipient may pay for the policy rather than the payor, although this may be offset by an increase in the monthly amount of alimony received.

There are other complex issues that can affect life insurance for obligors. For example, some life insurance policies may have certain exclusions or health restrictions. If the life insurance company fails to pay out the policy amount, due to death by suicide, an undisclosed health condition or another issue, the surviving spouse or other parent may have a cause of action against the estate of the decedent. Your family law attorney may consider these challenges when drafting the settlement, with both parties negotiating their agreement with the assistance of their respective family lawyers.

Other Life Insurance Concerns During a Divorce

Outside of mandated life insurance to cover alimony and child support, there are other concerns to keep in mind when dealing with life insurance during a divorce. If you have an existing life insurance policy that is not covered in the divorce settlement, make sure that you change your beneficiary after the divorce is final. Update your beneficiaries on other insurance policies, payable-on-death accounts and investment funds at the same time to avoid complicated disputes later on down the road.

In addition, you should discuss your life insurance policies with your divorce lawyer when reviewing your individual and marital assets. Some types of life insurance policies may be considered marital assets. During a contested divorce, New Jersey requires that each party provides an Affidavit of Insurance Coverage, containing information about all insurance policies held by both parties as well as any recently canceled policies. Your family law attorney will develop your insurance information in order to submit it to the court.

Consult With a New Jersey Divorce Attorney

Your family lawyer may provide more information about your insurance obligations, insurability and other concerns. Contact the experienced New Jersey family law attorneys at Lawrence Law by calling 908-645-1000 or by completing and submitting our online questionnaire for a consultation about life insurance and your divorce at our Watchung or Red Bank, New Jersey, office.

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