Life insurance plays a very important part in family law matters. One of the most typical uses for life insurance is to secure support obligations, especially child support. In other words, the life insurance benefit, after the death of the party obligated to make support payments, will ensure that financial support continues to the other party and/or their children.
While this sounds reasonable enough, there are typically two disputes around maintaining insurance. The first is the very real issue of cost – who can afford to pay for it. A second, more remote issue is the insured’s fear that an early (intentional or unintentional) demise will give the other person a financial windfall – often to the tune of millions of dollars.
This past week I spoke with an insurance professional, Elliot Matloff of The Matloff Company, about these issues and whether a particular type of insurance policy would best address the concerns parties face in securing support obligations. Below is what Elliot shared with me, in the context of what family law attorneys should know in order to advise their clients on this issue.
The Insured’s Objections
Let’s say that you are a lawyer representing a wife and you want her 40-year old husband to have a $1,000,000 life insurance policy as protection for the future support payments to your client, his soon-to-be ex-wife. He is not happy about having to buy life insurance for her protection and he feels like he is getting ripped off having to pay the premiums. He is also concerned that she will become a millionaire if he dies. That really bothers him. And if he doesn’t die, he fears that in 15 years or so he will have paid off the support obligation and in the meantime will have paid all of the insurance premiums for nothing.
The Policy Solution
There is a policy which can meet the needs of your client as well answer each of the ex-husband’s objections. With this policy he is not going to be ripped off, his wife will not become a millionaire by his early demise, and he can get 100% of his premiums back (or keep the policy for his new wife, girlfriend or children) if he pays off his support obligations within 20 years or so.
These are the specifics of the policy (assuming a $1,000,000 benefit level):
- The policy would be a $707,935 universal life policy. (The explanation of why a $1,000,000 policy is not required in this scenario is discussed below)
- The premium is $4,419 per year.
- After a support term of 15 years, 20 years or 25 years (his choice), when the policy ends, the ex-husband can receive 100% of his premiums back, if he wishes. If he hasn’t been able to pay off his support obligation, he keeps the policy and continues paying the premium.
- If he dies at any time, his wife will not get a $1,000,000 check because there is no lump sum with this policy. She will receive $3,334/month for 25 years, guaranteed ($3,334/month X 12 months/year X 25 years equals $1,000,002). Hence, a $1,000,000 policy is not required, since the payout will be $1,000,000 over time, thus reducing the cost of the insurance.
- The $707,935 policy is less expensive than a $1,000,000 policy.
This type of policy is a win-win. It protects the ex-wife and it gives some assurances to the ex-husband that once he has paid off his obligation to his ex-wife, he can recoup the insurance premiums he has paid. It also allows him to continue the coverage after his debt obligation has been satisfied, if he so chooses.
The Term Insurance Disadvantage
It must be emphasized again that the policy discussed above is a universal life policy. By contrast, term insurance is often used in divorce cases, since it’s cheap. It’s cheap because it only protects for a certain term of years — 10 or 15 or 20. But the reality of the world (and the court order) often requires the insurance to go beyond the 10, 15 or 20 year term period. Elliot told me that over the years he has had several women tell him that the term life insurance policies that their husbands purchased at the time of the divorce would cancel soon, because the premiums were going to skyrocket. With term insurance, the premium goes way up after the term period. The insurance then often is no longer affordable and the coverage has to be dropped, leaving the ex-wife without any coverage. The universal life policy discussed above avoids this problem because it has a lifetime guaranteed locked-in level premium.
This type of insurance planning benefits all parties. If you would like more information about taking out such a policy, contact your insurance agent or please feel free to contact Elliot Matloff: