There’s an interesting dichotomy between married couples’ view of life insurance.
On Contemplating Life Insurance
On one side, let’s call them Group A, there is considerable deliberation on securing life insurance, especially when the couple has a child and/or purchases a home. Group A may elect to secure life insurance on the spouse who has the higher income or they may opt for differing amounts of coverage on each spouse, dependent on income generation and/or income potential. Some members of Group A undertake intricate calculations, typically when working with a life insurance sales person. They want, or are told to want, coverage for:
- Mortgage premiums or payoff of the mortgage
- Extraordinary child-related expenses (e.g., daycare, health expenses, college)
- Retirement Savings
And the list may go on and on.
Group B has not even contemplated life insurance coverage. This is a varied group. For the lucky few, they have ample assets to cover loss of earned income upon death and, in effect, self-insure their own death. Others have free coverage from employment (e.g., one times or more salary equivalents) that they may or may not elect to supplement by purchasing, through their employment, multiples of their salary (e.g., 3 times their salary in addition to the one times their salary provided at no cost to them from group work policies). Lastly, there is the group who simply has no choice since they are uninsurable due to health or background impediments. Still, others do not even consider securing life insurance.
At the time of divorce, Group A and Group B may no longer have full autonomy in making their own choices, at least with respect to providing protection in the event of death. The spouse paying support, be it alimony or child support or both, may be ordered by the court to provide life insurance coverage in order to guarantee the continuation of their support obligations in the event of death. As in other areas, the decision here to have or not to have life insurance is no longer voluntary.
Other times, life insurance coverage is part and parcel of the divorce negotiations. The spouse or spouses with support responsibilities may be compelled to secure life insurance coverage or increase existing coverage as part of the settlement package.
Life Insurance in Divorce
Divorce mediation, similarly to legal negotiations, also deals with decision making in the event of the death of one spouse or both. Here the analysis can, and should be, quite expansive. At CMDR we believe that for Group A clients (those with life insurance), it is important to first analyze their existing coverage and the original rationale for purchase. Let’s say the couple purchased a policy to provide for mortgage payoff and there is no longer a mortgage on the real estate, this coverage may no longer be warranted. Further, it is important to consider not only the after death protection that needs to be provided, but the cost of the coverage. The following questions are important:
- How much protection does the couple need today and hereafter? Should they create a decreasing obligation as support liabilities are reduced over time? How many years of coverage do they need?
- How much is the annual premium? Is it a level premium for the life of the policy or does it change overtime?
- Who pays for the premium? The insured? The beneficiary? Both parties? An account set aside for funding the policy or prepayment of whole life variety?
- Is the couple creating a hybrid approach in which an asset pledge is coupled with insurance protection? If so, how does this work? Is, for example, annual proof provided for both asset maintenance and insurance policies? How is the proof provided and when?
Don’t overlook the various versions of permanent life insurance (e.g., universal life, variable life) secured by couples who wished to combine investment growth with life insurance protection.
Here the couple needs to ask some hard questions:
- What kind of cash value have they built up (equity) and how much is the annual premium?
- Can we afford to maintain this policy or policies?
- What is the cash surrender value of the policy (typically less than the equity)?
- What kind of decisions do we have to make, if any, with respect to investment strategies and projected growth?
- Is this a good investment or are other investments likely to produce a better or more accessible return?
The central questions can be reduced to a short list.
- What expenses/obligations require protection in the event of death and how do they change overtime?
- In what manner can we afford to provide this coverage and how will the obligation be paid?
Mediation offers a forum in which the analysis of what kinds of protection exist, be it insurance and/or assets, is conducted in a thoughtful and thorough manner. Some couples find they are, in effect, over insured, whereas others are under insured or uninsured. The process enables couples to separate emotion and fear from reality. Planning for death protection at the time of divorce has different priorities and objectives than at the time of marriage. With the guidance of a knowledgeable and impartial mediator, the couple is able to distill fact from fantasy and fear and plan ahead based on a real-time analysis of the family’s present and future need for protection in the event of death.