4 Pitfalls In Life & Disability Insurance in Divorce

Most divorce agreements have stipulations in them with regards to Life Insurance on both spouses naming each other on life insurance policies as beneficiaries until the children reach age 18.  This ‘add-in’  is designed to protect the parties if one parent were to pass and the children were left to be cared for by the surviving spouse.

If you are going to be receiving child support until children are age 18, and something happened to your ex, you are basically purchasing life insurance to secure income protection to be able to still care for your children in the absence of those support payments being completed.

My last 5 clients who have gone through divorce mediation shared that were all stipulated the same $250,000 as being required until the youngest turned age 18. Made me think “Hmmm? Is this the cookie-cutter amount?” I had my best friend ask her mediator about the required amount and how it was figured and she answered “This is the amount we always use”. Funny because I’m not sure how when I suggest as a Financial Coach that someone should be sure to have 6X their salary in life insurance to protect their family if something were to happen to them, how an amount of $250,000 is the “suggested amount” to protect the financial aspect of the divorce agreement.

Here’s what happened to the last 3 women I’ve counseled. They all HAD the ‘court required’ $250,000 term life already in place on each other and they basically kept the same policy and called it ‘the divorce life policy’, copied the death benefit page and dropped it on the table at the mediation session and checked it off their ‘lists’.

PROBLEM ONE: While they met the immediate requirement, they did not look at how far into the ‘term’ they were. The kids are ages 6 + 8 + 10 so they in essence have to keep this policy with their ex-spouse named for another 12 years. The life policy was written 15 years ago when they married and only has another 5 year rate guarantee (they had purchased 20 year term) which means that in 5 years their rates are going up and they are stuck having to keep this policy with the rates increasing every year after year 5 and through year 12.

Solution: Shop for a new term policy via an agent that has multiple choices of markets for the amount required and for the term required or more than the term required. If you want to replace the one you had with this one, only do so after you have gotten full underwriting approval and the new policy is in your hands and accepted by you.  This way you know exactly what your rates will be for the new guaranteed term. Most term life policies can be quoted/purchased with 10-15-20-30 year rate guarantees.

PROBLEM TWO:  The ‘cookie’ cutter amount of $250,000 truly doesn’t address the real financial need or replacement of the child or spousal support in many cases. In the case above, this wife was receiving $100 week child support for each of the children until each reaches age 18. That looks like this:

Child one: Age 10 $5200 year x 10 years $52,000

Child two:  Age   8  $5200 year x 12 years $62,400

Child three: Age 6  $5200 year x 14 years $72,800

THEN $1500 month spousal support for 10 years $180,000)

IF something were to happen in YEAR ONE to the ex-spouse you can see that the financial loss of child support and alimony would be $367,200 but the life policy was in the amount of $250,000.  In many cases there are Social Security  “survivor benefits” awarded to children when a parent passes away, but not knowing what that amount would be or considering that these 3 children also will still have college costs, undervaluing the Life Insurance Benefit/requirement is a huge mistake in divorce negotiations.

Solution:  Don’t accept the cookie cutter version! Make sure that you are looking at the BIG picture and clear about the financial needs that are being met with the life insurance proceeds and be certain to get the right protection for not only yourself but ensure that the proper amounts are being suggested/negotiated and then put in place.  I also feel that many times what stands as a risk is leaving the premium to be paid by the ‘other party’.

PROBLEM THREE:  Are they really making the payments? Is the policy still in force today?

Yes, the policy gets dropped down as evidence that you’ve met the requirement but then like everything else you are ‘on your honor’. Problem with Life Insurance is no one asks their ex-spouse for an annual receipt that they’ve been making the renewal payments or proof they’ve been keeping the policy in force.

Solution: I know many people who when times got tough, let their life insurance premiums lapse. I honestly wasn’t willing to take that chance with my soon to be ex who had a history of ‘letting mail pile up & not giving a shit about alot of things that he felt were necessary evils like insurance’. I stipulated in our agreement that I would purchase the policy on his life and made myself the ‘policy owner’ as well as the beneficiary and had purchase the policy on me in the same fashion. If he opted to not pay the premiums on the policy he purchased to protect himself if something happened to me that would be his doing not mine. But I certainly was not going to risk the financial security of myself and my children if he opted to not keep that policy in force for 12 more years or if he remarried and his new spouse non-chalantly upon updating other things decided to change the beneficiary on this policy to herself.

PROBLEM FOUR:  No one seems to be addressing the issue of Disability Insurance at the Mediation table. If the person who is providing either the child support or the spousal support or both were to have an accident or illness and be unable to work for a period of time, it would obviously impact the ability to meet their financial obligations spelled out in the divorce agreement.  I’m stumped at how this goes un-addressed in so many divorce agreements.

One of my clients (a small contractor/business-owner) was in a very bad car accident.  He was unable to work for six months due to his injuries and had multiple surgeries. Not only did he have mounds of medical bills to contend with, he had a payroll to meet and business bills to pay and was unable to contribute to bringing more business in the door. He was ‘just keeping the business afloat’. The event triggered a huge concern for his ex-wife, as the needs of his children were met through his child support payments and his providing for half of the kids ‘activites, school lunches, medical bills/ortho, etc”. His support obligations would have been impossible to meet without Income Replacement/Disability Insurance.  Luckily for this guy he had secured one of those ‘accident/hospitalization’ and disability policies through a past employer before starting his own business. It didn’t meet all of his needs but it did cover the cost of his child support during the time he was unable to work.

Solution: Whether you are on the receiving or the giving end of the support issue, it is imperative to have the proper protections in place with regard to fulfilling support obligations. It is also important to consider that if you are out in the work-force and something happened to you YOUR INCOME for YOU is also at risk. How would you pay your own bills if an injury or illness were to occur that kept you out of work for a period of time? It is super important to talk with an Insurance Professional about these important coverages.