Life insurance plays an important role in divorce proceedings. It may be used to insure the payment of child support or alimony. A parent with one 10-year old child who is required to pay $150 per week in child support, will pay $7,800 per year and $62,400 over the eight years. The custodial spouse may wish to insure those payments with life insurance in case the non-custodial parent dies suddenly.
Life insurance, in addition to securing child support or alimony, may also be considered as an asset if it was acquired prior to the divorce. Some key points to consider:
· Permanent insurance may have a value greater than the surrender value listed on a statement, especially if the insured is over 70 years of age or terminally ill.
· Whole Life Insurance is a desirable asset, as it pays dividends usually at rates higher than bond rates, its cash value accumulations are tax deferred, and the insured by borrow against the cash value. Consider paying a spouse 50% of the cash value and maintain the policy.
· If a settlement agreement calls for one party to obtain life insurance, have the potential insured go through the underwriting process before signing the agreement to be sure that the person is insurable at reasonable rates. Remember, almost everyone is insurable but the premiums may be exorbitant.
· Minor children should not be named as beneficiaries. An insurer may pay the money over to a parent without having the parent named as a guardian through a Probate Court and thus there will be no control over whether the money is actually used for the benefit of the children. Further, if the money is placed into an UGMA account the child will get the funds at his/her 18th birthday to use as he/she desires, even if it is used inappropriately.
· If you list a Trust or Trustee as the beneficiary for one or more children and there is no trust document, most insurers will pay the benefits to the policy owner or his/her estate.
· If the policy is large, there may be tax advantages to transfer the life insurance policy from the insured to the other spouse to avoid estate tax issues.
· The beneficiary should also be entitled to receive notices from the insurer if the policy is lapsing. The beneficiary needs to know that the policy is being maintained in accordance with the agreement.
Contact Steven Hirsch to represent you in a divorce or to act as a neutral mediator, where you and your spouse can reach a confidential settlement based upon the interests of the parties.
Reference: Family Lawyer Magazine, "The Top 10 Life Insurance Issues in Divorce", Noah B. Rosenfarb, CPA.