Securing Support Obligations Through Life Insurance Policies

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BY: VALERIE DYE 

Under the Family Law Act of Ontario, the court has the power to order an individual to make support payments for children and even former spouses. It is quite possible that a support payor may die while children are still minors and while he or she is still under the obligation to pay child support or spousal support. Thankfully under section 34 (j) of the Family Law Act, the court also has the power to make an order requiring that a spouse who has a life insurance policy should designate the other spouse or child as beneficiary irrevocably. Where this is done, the death of the payor will not result in hardship for the former spouse or for the children.

Apart from court orders, the requirement to have life insurance should be included in separation agreements for the similar purpose of ensuring that support obligations are not jeopardized by the death of the payor.  As such, when preparing a separation agreement, it is important for the drafter to include the life insurance clause where there are minors or dependants.

More importantly, the designation of the former spouse of the children as a beneficiary must be irrevocable. In section 190 of the Insurance Act, an insured may designate a beneficiary to the proceeds of his or her life insurance policy. Under section 190 (2) of the said Act, the insured may from time to time alter or change the designation thus replacing the designated beneficiary whenever he or she chooses to do so.  Obviously, the ability to change the designated beneficiary to a life insurance policy will defeat the purpose of having a policy to protect support obligations after death.  Section 191 of the Act deals with irrevocable beneficiaries and makes it difficult for the insured to alter or change the designated beneficiary at will.  Section 191 (1) of the Insurance Act states as follows:

An insured may in a contract, or by a declaration other than a declaration that is part of a will, filed with the insurer at its head or principal office in Canada during the lifetime of the person whose life is insured, designate a beneficiary irrevocably, and in that event the insured, while the beneficiary is living, may not alter or revoke the designation without the consent of the beneficiary and the insurance money is not subject to the control of the insured, is not subject to the claims of the insured’s creditor and does not form part of the insured’s estate.

As such, an irrevocable beneficiary designation in a court order or separation agreement is more airtight than a simple designation which is revocable. Furthermore, a beneficiary designation which is revocable will be subject to the rights of creditors in that if the deceased leaves unpaid debts the proceeds of the policy may be used to satisfy those debts. Where the policy has an irrevocable beneficiary, it becomes more difficult for the proceeds of that policy to be applied to other creditors and to other persons who have competing claims against the estate.

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