Life Insurance and Divorce

Child support, college contribution, health insurance, and alimony are issues that are often addressed in a divorce or separation agreement. This means that the issue of life insurance must also be addressed.

The primary purpose for life insurance in matters of divorce is to ensure that payments for child support, college, health insurance, or alimony continue in the event that the obligor dies prior to the satisfaction of his or her obligations under the divorce or separation agreement.

The tricky part in purchasing the insurance policy is often calculating the amount of the policy (i.e. what is the value of one’s life). It is important not to be over or under-insured. Another issue that often arises is determining exactly what is it that needs to be insured (i.e. what is the individual’s obligation under the divorce agreement).

Let me give you an example:

A couple is preparing for divorce. The mother is going to be the primary custodial parent. The couple has two children, ages 13 and 15. There is no alimony order; however, there is child support, that the father will be paying.

Let’s say both the mother and father have committed to paying $15,000 each year for college for each child. The child support paid by the dad will be $600 per week until the youngest child is 23.

The period needed for insurance is 10 years (youngest child is 13). The father’s obligation at a maximum would $120,000 for college ($15,000 per year for 4 years for 2 children) plus child support of $312,000 ($600 per week times 52 weeks per year times 10 years).

The total amount for the death benefit for child support and college is $432,000 ($120,000 plus $312,000). However, you must keep in mind the value of current dollars for future interest and the decreasing amount needed as each week as there will be $600 less needed from the total death benefit.

Due to these factors I suggest a 70% rule. Using this rule, the life insurance amount is 70% of the full amount needed. This is because each week the amount of money needed for insurance, college, and child support decreases by $600. Under this scenario, I would advocate that the father should need to secure a 10-year term policy with a death benefit in the amount of $303,000 (432,000 x 70%).

Another offset against the amount of insurance needed will be the social security death benefit the children would receive if the father were to pass away before they reach the age of 18.

Using the example above, let’s say that the father had a social security death that will benefit the children in the amount of $1,800 per month. This lowers the child support obligation from 31,200 per year to $9,600 per year. $31,200 ($600 per week x 52 weeks) – $21,600 (social security death benefit $1,800 x 12 months) = $9,600.

Regardless of the situation, a good family law attorney should work closely with your life insurance agent to get the correct amount of insurance at a fair and reasonable price.