BY: ANDREW STEWART
Going through a divorce is tough. Thankfully, I have never experienced a divorce and hopefully, never will. I have had a few friends and clients go through a divorce and they all described it as one of the most miserable times in their lives. Among the messy tasks that must be undertaken in a divorce, sorting out life insurance is one that often gets overlooked and neglected. In the midst of the custody battles, divvying up assets, searching for a new home, ensuring the children adjust as smoothly as possible and just generally re-acclimating to life as a single person, figuring out what to do with life insurance would be far down my list as well.
However, dealing with life insurance is an important part of the divorce process. For those getting divorced and completing a divorce settlement, life insurance often enters into the agreement as part of the finances. The number one reason why life insurance would be ordered to have in place is because it protects the financial interests of both parties and their dependent children. There are a few things you should consider, including how much life insurance to purchase, the type, and who will pay the premiums.
If you are required to pay child support and alimony income, you will often also be required to have life insurance, so you can still fulfill your obligation in the event of your death. Protecting child support or alimony income is especially important for the spouse who takes primary custody of the children after the divorce. The money this spouse receives in child support from the noncustodial parent is supposed to go toward feeding and clothing the children, and saving for post-secondary education not personal vacation trips to Las Vegas. If the worst happens and the noncustodial parent is not around anymore, this income goes away and potentially leaves the custodial parent in a bind.
If you have custody of the kids, the easiest way to protect yourself against the above situation is to maintain a life insurance policy on your ex-spouse with a benefit amount high enough to replace your child support or alimony income at least until the last child reaches eighteen. Ideally, as the custodial parent, you should own the policy and make the premium payments on it. Depending on what kind of relationship you maintain with your ex-spouse, it may not be wise for them to be the owner and to trust them with the policy upkeep, including premium payments. By owning the policy yourself and making the payments, you ensure it stays in force.
Now you might be thinking, yes Andrew I agree with you and it all makes sense but I don’t feel like paying for the policy? Well if you don’t wish to be the owner or the payor of the policy, it’s a good idea to consider having your beneficiary status as irrevocable, so your signature is required before any changes can be made.
Logical questions you may have would be “what type of insurance would be best suited and how much coverage should I have”? It would probably be best to get a term insurance for the required amount that covers the period of time it takes for your children to become adults. This is because child support obligations are likely to end at some point and the term you choose should be based on how long that financial obligation is likely to last. As an example of how much, if your former spouse is paying $15,000 per year in child support payments for about fifteen years, then a good starting point would be $15,000 X 15 years = $225,000 of coverage.
One of the biggest challenges of divorce is that it frequently turns people into single parents. Divorced people in these sorts of situations become solely responsible for the care and upbringing of their children. When this happens, it is important to have an emergency plan in place for the children in case the worst happens. If divorce makes you a single parent, you need adequate life insurance on yourself to protect your children.
For example, if you make $50,000 per year and your youngest child is six, a death benefit of $600,000 replaces your income until that child is eighteen. A $750,000 benefit sees the child through until he is twenty-one. In an era of rapidly increasing college costs, choosing the larger benefit amount is prudent as long as the premiums are not too oppressive.