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Life Insurance

 

There are different types of life insurance. There is group life insurance coverage that many people have through their employment and there are private life insurance policies that people pay for outside of their employment.

Life insurance coverage through employment:

If you or your spouse works for a large employer, there is a good chance some form of group life insurance coverage will be in place.  Some employers offer group life insurance coverage to employees free of charge.  Other employers offer group life insurance coverage as an option that is funded through payroll deductions.  Some employers offer a combination of the two.  For example, an employer may offer free group life insurance coverage equal to one times the employee’s base salary, but the employee can elect to pay for additional life insurance coverage.  Normally, when you get divorced, no value is going to be assigned to group life insurance coverage that someone has through their employment.  The issue is not going to be the value of the coverage (i.e., should the coverage be assigned a dollar value), the issue is going to be whether or not the divorce judgment should require the employee to name the ex-spouse and/or the parties’ minor children as beneficiaries of that coverage for a certain period of time.  See discussion near the end of this life insurance link.

Private term life insurance policies:

A private life insurance policy is a policy that you or your spouse obtained outside of employment. There are a lot of different names for the different types of private life insurance policies, but most private life insurance policies fall into two categories, “term insurance” and “whole life” insurance.  Term insurance policies typically have level premiums for a fixed term.  For example you may have a ten year term policy that provides $100,000 worth of coverage with a fixed premium of $200 per year for the ten year period.  You pay the $200 each year.  If you die during the 10 year period, your insurance company pays your beneficiary the $100,000.  If you don’t die during the 10 year period, then at the end of the 10 year period, the policy essentially ends and you don’t receive any money.

Typical term policies are for 10 or 20 year periods.  An advantage of term policies is that they can provide a large amount of coverage at a low price, particularly if you are relatively young.  A disadvantage is that your premium payments do not build up any equity in the policy.  Most term policies don’t really terminate at the end of the term.  Typically, you can continue paying the premiums and keep the policy in force.  However, after the term expires, the premiums increase enormously so that, usually, it makes no sense to continue the policy because it is much cheaper to go get a new term policy.  However, if, at the end of the term, you have some life threatening illness, such as cancer, you may want to continue paying the premiums.

As with group life insurance coverage through employment, there is typically not going to be an issue about the value of a term policy, because there is no equity and no real value to the policy (unless the insured has a life threatening illness at the time of the divorce).  The issue with term policies is going to be whether or not the divorce judgment is going to require the insured person to continue paying the premiums and designate the ex-spouse and/or the minor children as beneficiaries for a period of time.  See discussion near the end of this life insurance section.

Private whole life insurance policies:

A “whole life” policy is very different from a term policy.  A whole life insurance policy builds up equity and can have a substantial value.  The value of any whole life policy needs to be taken into consideration when you divide community assets.

An example of a whole life policy may be a policy where you pay $100 every month for $100,000 of coverage.  Whole life policies are much more expensive than term policies, but they build up equity over time.  You can cash them in (i.e., surrender them) and receive a check from the insurance company.  Whole life policies have fixed premiums.  Whole life policies typically do not have a term.  You can maintain the policy for your lifetime by continuing to pay the premiums.

If you or your spouse has a whole life policy, you need to find out the value of the policy.  The owner of the policy can contact the insurance agent of the life insurance company and ask for a letter that will set forth the value of the policy.  When you receive the letter, it may set forth two different values.  One value is the current equity value.  The second value is the “surrender value”.  Many policies include a penalty or “surrender charge” for cancelling the policy.  So, if you and your spouse decide that the best way to deal with your whole life policy is to surrender it and divide the proceeds, be aware that the amount you will be dividing is the surrender value.

If you surrender a whole life insurance policy, that can trigger income tax consequences.  A portion of the surrender proceeds may be taxable income.  Any taxable gain resulting from the surrender of the policy should be split between you and your spouse.

If you or your spouse maintained a whole life policy for many years, the value of the policy can be large.  Don’t ignore this potential asset.  You may not want to surrender the whole life policy.  You or your spouse may want to keep the policy.  If your spouse wants to keep the policy, he or she could take ownership of the policy at a value equal to the policy’s equity.  You may want to make an agreement that discounts the value of the policy in exchange for your spouse agreeing to maintain you and/or the children as beneficiaries of the policy for a period of time.

There are other types of life insurance policies.  For example, there are “universal life” policies that are a hybrid of term and whole life policies.  You have to look at each of your life insurance policies and talk to your agent or life insurance company and figure out which policies have equity value and which do not.

Judgments that require one or both spouses to maintain life insurance coverage:

Whether you or your spouse have group life insurance coverage through employment, private term life insurance, private whole life coverage, or any other type of life insurance, you should consider whether or not your divorce judgment should require one or both spouses to maintain life insurance coverage for the benefit of the other spouse and/or the parties’ children.  For example, if Father is paying Mother $2,000 per month in child support and Father is later killed in a car accident, Mother is going to need life insurance proceeds as a substitute for child support.  The life insurance issue should cut both ways.  If Mother dies, Father will suddenly have 100% custody of the children. He is going to need funds to support the children, even if he has a job.  For example, there may not have been a child care expense before Mother’s death because Mother had the children in her physical custody most of the time.  After Mother’s death, Father will have a child care expense.

Even if neither party has any life insurance, each spouse should consider getting some life insurance.  If you are relatively young, you can get a fairly large amount of term life insurance that is not very expensive.  You can go on-line and get quotes to give you an idea of the cost.

If the life insurance issue were litigated, the judge would have discretion to include or not include a life insurance provision as part of any support order.

If child support is part of your divorce judgment, a common life insurance provision in the judgment may require one or both parents to obtain and/or maintain a certain amount of life insurance coverage until the youngest child is 18 years old.  If Father is paying $2,000 per month in child support for one child and that child is 6 years old, a total of $288,000 of child support may be paid over the next 12 years, the judgment may require Father to maintain a $300,000 life insurance policy until the child turns 18 years old.  The same approach can be used to determine a reasonable amount of life insurance when spousal support is owed.

If your settlement agreement requires life insurance coverage to be maintained, who should be the beneficiary?  If you have minor children, should the children be the beneficiaries or should the other parent be the beneficiary?  You want the other parent to be the beneficiary.  If the minor children are the beneficiaries, the life insurance proceeds will be put into blocked accounts by the court until the children become adults.  It is the surviving parent that should receive the life insurance proceeds so they have funds available to support the children while the children are minors.

Life insurance can be a very touchy issue.  Many parents will have no problem designating their children as beneficiaries of their life insurance coverage, but they do not want their ex-spouse to receive a large sum of life insurance money.  They are concerned the money won’t be spent for the benefit of the children.  There is another issue you need to consider.  If one or both spouses remarry and/or have additional children, then life insurance coverage should also exist for the benefit of the new spouse and the new children.

If you feel you need life insurance coverage on your soon-to-be ex-spouse, with you as the beneficiary, and you want to be the sole beneficiary, but your spouse objects, you can usually resolve the dispute by agreeing to pay for the policy yourself.  If you agree to pay the premiums, there is really no legitimate reason why your spouse should object.  All your spouse has to do is to agree to cooperate in obtaining the policy (i.e., cooperate with the application process and submit to any required medical exam).  You will be the owner of the policy.  You can decide what kind of policy you want (term; whole life; universal life) and the amount of coverage you want.  You can also decide how long you want to maintain the policy.

Whenever you are dealing with life insurance issues, you must be very careful about writing an enforceable life insurance provision.   Hundreds of thousands of dollars may be involved.  If the settlement provisions are vague, it may end up costing you a fortune.  You may want to include a provision in the settlement agreement that allows you to confirm once per year that your ex-spouse is actually maintaining a life insurance policy in accordance with the terms of your settlement agreement.

We include sample life insurance provisions in our “Marital Settlement Agreement” package, which is discussed in another section of this website.  [See, “Judgment” and then sub-topic, “Agreement Template”.  The life insurance provision can be part of a Marital Settlement Agreement that is attached to your divorce judgment or, if your judgment is going to be a collection of Judicial Council forms, the life insurance provision can be a “stand alone” attachment to the child support and/or spousal support Judicial Council forms, which is discussed in another section of this website.  [See, “Judgment” and then the sub-topic, “Forms Approach”.

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