Sometimes in life things donít work out as we plan. One of the most trying examples of this is when a couple decides they canít make their marriage work and, subsequently, file for divorce. Divorce takes a significant financial and emotional toll on both parties, their children, and other family and friends. In the midst of the immediate financial and legal concerns, couples need to look beyond the present to help ensure that their financial futures are secure and that the future needs of children, such as education expenses, will be provided for in the event of an untimely death. Life insurance may offer a solution.
With the majority of care belonging to mothers with relatively modest average incomes, concerns arise regarding the future educational expenses of college-bound children. According to The College Boardís annual report (Trends in College Pricing, 2016) the average sum of tuition, fees, room and board for the 2016Ė2017 school year was around $45,000 at private colleges.
Because educational expenses are only expected to increase, the need to plan for future financial security during divorce becomes even more paramount. Letís look at several different scenarios.
After divorce, if the spouse paying alimony and/or child support were to die, then the custodial parent may be hard-pressed to maintain the childrenís current lifestyle, let alone be able to afford the potentially significant college fees. On the other hand, if the custodial parent were to die prematurely, the ex-spouse may be at a loss to cover daily childcare expenses. For these reasons, divorcing couples may want to strongly consider making life insurance policies part of the divorce decree. An example of this language would be as follows: "(Name of husband or wife) shall maintain insurance on (his/her) life in the total amount of ($ amount) as long as (he/she) is required to pay child support. The insurance shall be payable to (Name) as trustee for the minor children. If such insurance is not in force at death, the children shall have a claim against the estate for ($ amount)."
A custodial parent may want to look into purchasing a life insurance policy on his or her ex, but if this turns out to be an impossibility, transferring ownership and beneficiary arrangements on an existing policy may be another option. If policy premiums fall outside of the budget, the custodial parent may request alimony or child support increases to cover the costs. If the non-custodial parent remains the policy owner, the divorce decree can include arrangements to ensure the custodial parent is named as the irrevocable beneficiary and receives ongoing proof that the payments continue to be made and the policy remains in effect.
A parent without custody may wish to keep the policies he or she already has to protect the financial interests of other family members, such as children from a new marriage. In this case, the non-custodial parent should consider purchasing a new policy with the ex as the beneficiary. If this is done before or during the divorce proceedings, gift tax will not be owed. Premiums may be tax deductible if policy ownership belongs entirely to the ex.
For existing policies, individuals should remember that the insurance company must be notified of any beneficiary changes: Using a will for this purpose will not be valid. In addition, should the insured remarry and the policy name the "husband" or "wife" of the insured as the beneficiary, the new spouse may receive the proceeds. If the insured does not remarry and this same policy language is in force, then the proceeds may be paid to the secondary beneficiary. If the insuredís estate is named as the new beneficiary, insurance proceeds will likely be held up in the probate process. If minor children are named as the new beneficiaries, additional problems may arise, as insurance companies generally will not pay minors directly. For this reason, it may be a good idea to create a trust for minor children and name the trust as the beneficiary of the policy proceeds.
Laws vary from state to state, so consulting with an insurance professional is very important. Divorce is rarely easy, but with a well-planned strategy, the short- and long-term financial needs of children can be ensured should life take an unexpected turn.