Families typically consider life insurance policies as a forward looking estate planning tool, which it certainly is. However, in case of the unfortunate life event such as a separation or divorce, life insurance can also play a vital role from a context of family law.
The Importance of Life Insurance in Family Law: Security Blanket
For separated spouses, life insurance is most commonly used as security for a child and/or spousal support obligation that may be owed at the time of their death. Similar to property insurance that is obtained as security in the event of any potential theft, fire, or damage to our homes, life insurance is obtained in the event of a spouse or parent's death. It can provide security to ensure that the other spouse and the children are provided for in the future. The obligation to maintain a policy of life insurance as security can be mandated by either a Court Order or a written agreement, known as a Separation Agreement.
The Court may require that in situations where a parent or spouse does not have life insurance, a new policy is purchased upon separation and the other spouse/child is designated as the beneficiary.
The two most common questions family lawyers are asked in relation to life insurance are based on the amount, and the duration of life insurance.
The Amount of Life Insurance in case of Separation or Divorce:
How much life insurance is required, on one hand, to provide sufficient protection for an existing support obligation and, on the other hand, that does not result in a potential windfall for the recipient? When negotiating the amount of insurance, it is important to contemplate whether a review mechanism or an automatic discounting formula should be included in an Agreement to allow for an adjustment of the life insurance policy amount over time. To calculate your basic life insurance need, read Rubach & Associates' previous blog post here.
The Duration of Life Insurance in case of Separation or Divorce:
For what time period would a spouse be legally obliged to maintain a life insurance policy? As life insurance in this context is intended to be security for a support obligation, the duration to maintain life insurance should be consistent with the timelines for payment of spousal or child support. Such that when a party's obligation to pay support terminates, life insurance should also end.
The amount and duration of life insurance are both important considerations as they involve the balancing of rights of both spouses/former spouses and children. This is especially important in contexts where a spouse wants to designate all or a portion of their existing life insurance to a new partner (especially where they no longer qualify for additional life insurance and/or the policy premiums are no longer affordable).
Family law lawyers, together with the assistance of a financial planner or life insurance professional, should work to assist spouses/parents with determining what life insurance policy may be appropriate based on their individual circumstances.
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