life insurance needs after divorce

Life Insurance Needs in Divorce

When a divorce is close to becoming final, one of the last things you will discuss with your Chicago divorce attorney is the need for Insurance. Once you have negotiated the terms of the spousal maintenance or alimony that you are going to receive the amount of child support and payment of child-related expenses that each parent is going to be responsible for and there may be a college expense component or even support for a child over the age of 18 if you have a disabled child,  you will talk about Life Insurance and Disability Insurance.  It is important to understand the difference, how each of them can be used to protect you in the future and which is best for your individual situation.  It is hard to think about death but it is necessary to make provisions for the unexpected death or disability of the person that you are relying on for support.

Difference Between Life Insurance and Disability Insurance

First, let’s discuss the difference between Life Insurance and Disability Insurance as they relate to the provision in a divorce agreement.  Life Insurance is a contract that will pay a sum certain out to the listed beneficiary upon the death of the insurance.  Disability insurance is a contract that will pay out to the insured a monthly benefit to ensure that person maintained an income stream, even if they could not earn a paycheck.  Depending on what you need to protect it is important to understand which of these types of insurance coverage is best for you.

Insurance Needs when Spousal Support is Ordered

If you are awarded Alimony of say $5,000 per month for ten years, you are counting on a stream of income for the next ten years of $60,000 per year.  If your ex-spouse (payor) was to die prior to the ten years then your stream of income would immediately terminate without warning and you may be left in a difficult financial position.  Therefore, you would want to protect your stream of income with insurance.

You could request the payor obtain a life insurance policy in the amount of $500,000 with you as the beneficiary so that in the event the payor dies you would receive a lump-sum payment and not have to worry about your stream of income abruptly terminating.  The payor would also want to put in place a provision that he can reduce the benefit amount over time to accommodate you obtaining a windfall in the event of his death after payment for a substantial period of time.

As an example, it would be reasonable for the payor to be able to reduce the amount of the insurance coverage each year by at least $60,000 after the first two years.  Year one and two would be $500,000 coverage and then in year three the coverage could reduce to $420,000 and in year four $360,000, year five to $300,000 etc. so that the coverage mirrors the remaining amount of maintenance to be paid.

Other Insurance Policies to Consider

In addition to the consideration of life insurance and amount, there are different types of insurance policies that can be obtained and it is best to talk to a trusted insurance advisor about these types.  For example, a term life insurance policy is a policy that is in effect for a specific term with the same yearly cost for the life of the term.  This is often sufficient to cover your needs and make sure you are covered for the risk of loss to your stream of payments.

On the other hand, it could be said that the payor’s risk of becoming disabled is higher than that risk that the payor may die.  If this is the case and the payor becomes disabled and unable to pay the maintenance and files to significantly reduce or terminate the payments, a life insurance policy does not help you and you are at risk that your stream of payments could end.  A disability policy insuring the payor in the case he becomes disabled with a paycheck would allow him to maintain the maintenance payment and protect you.  The amount and terms of the coverage have to be worked out to make sure you are protected but it is important to consider disability insurance along with life insurance when deciding which is best for your specific circumstances.

Insurance Protecting Child Support Payments

Turning to protect the amount of child support you will be receiving from the payor, the same principles apply.  In the event the payor dies, you want to be named as the beneficiary of a life insurance policy so that you obtain a lump sum payment since the stream of child support payments will terminate.   The same logic applies to disability insurance, it is more likely that a payor will become disabled than die during the period a payor is obligated to pay child-related expenses so it is wise to consider the use of disability insurance as a tool to protect receipt of payments.

When child support is being protected, often times the payor wants to name the minor children as the beneficiary and not the other parents.   This is difficult because if a minor is named as the beneficiary a court case has to be opened and the funds administered through the court.  It is better to alleviate this requirement and name the other spouse as the beneficiary “for the benefit of the minor children.”

Consult Your Lawyer About Insurance Protections Before Your Divorce is Final

There are always cases where a payor parent is not insurance as a result of a health condition or some other circumstances that make them uninsurable.  There are other things you can look to for protection such as retirement assets or working it out in an estate plan.  Different options are available but it is necessary to talk with your attorney about these very important protections before you finalize your divorce.

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