Life insurance is very important and should be considered in a divorce whenever alimony and/or child support is involved. During your divorce process, here are some things you should ask yourself about life insurance so you are educated and prepared:
1. How Do I Know If We Should Consider Life Insurance?
One of the most common reasons for considering life insurance is to provide the funds needed to replace support payments in the even that they can no longer be made, usually due to the death of the payer.
2. Can An Existing Policy Be Used?
It may be, as long as the amount of coverage is adequate to replace the loss of support. This is if the remaining term is the length of the period of support that will be paid.
3. When Should I Apply For Insurance?
The insurance process should be complete before you and your spouse sign the final divorce settlement agreement. Other options should be considered if the coverage will not be available because of health issues or if the premiums are too expensive.
4. How Much Insurance Do I Need?
The amount of coverage should be equal to the amount of support payments due over the entire period that the support will be paid. It can be reduced over time.
5. What Type Of Insurance Do I Need?
This depends on the length of time that the support will be paid and if the insured spouse has other beneficiaries that he or she may wish to provide for after the support obligation has ended.
6. Who Should Own The Policy?
The owner of the policy can change who the beneficiary is, reduce the coverage amount or cancel the coverage at any time. If there is cash value on the policy, the owner can decide how the cash value can be used. If you are the party receiving the support payments, it may be in your best interest to be the owner of the policy.
7. Who Should I Name As Beneficiaries?
The beneficiaries should be those who are receiving support payments and would suffer financially if the payments were to stop due to the death of the payer.
8. How Do I Find The Right Insurance?
If the party who is obligated to make support payments is also the one paying for life insurance, they may choose the cheapest policy. However, a poorly rated company may be the one offering lower rates. It would be in the best interest of the party receiving support to be sure that the insurance is with a highly rated company.
9. Can Life Insurance Provided By My Employer Be Used To “Insure” Support Payments?
Using life insurance to insure support payments is not recommended. The insurance may no longer be available if the employer changes or eliminates the coverage of the insured party.
10. Are Life Insurance Premiums Tax Deductible?
For tax purposes, if life insurance policies qualify as spousal support, then the payments are deductible by the payer and taxable to the recipient. The payments would have to be made in accordance with the terms of the divorce or separation agreement, an the owner of the policy would have to be the recipient spouse.