Using Life Insurance to Secure Child Support Obligations

As a result of divorce or a separation, many parents must make child support payments for their child's living expenses and education. Child support helps divorcing couples provide for their children in the way they had envisioned when they were still married.

If the children are very young at the time of the divorce, child support payments may continue for many years, and a lot can happen in the course of 10, 15, or 20 years. A common question for divorcing parents is: What happens if the parent who pays child support dies before the support obligation is over? One way to ensure that child support payments will continue even if the paying parent dies is to secure those payments with a life insurance policy.

Life Insurance as Part of a Separation Agreement

Many couples choose to secure their support obligations through life insurance. Some already have life insurance. Others may obtain new or increased coverage at the time of the divorce. Using life insurance to back up a support obligation is a practical way to protect the cost of raising a child if the paying parent dies.

The question of what happens to support obligations after the paying parent's death should be addressed directly in the divorce settlement agreement. Some of the key questions to work through include:

• What are the downsides to having the life insurance benefits paid to the child?
• What are the benefits and risks of naming the surviving parent as the beneficiary of the policy?
• What are the benefits of having the life insurance policy proceeds paid into a trust?
• What happens if the paying parent changes or eliminates the coverage?
• What happens if the paying parent changes the beneficiary designations?

These and related issues can be addressed in a properly drafted life insurance provision in the divorce settlement agreement. If you have questions about using life insurance to secure child support, an experienced family law attorney can advise you and draft the settlement agreement on your behalf.

Naming the Child as the Beneficiary

Some couples take what they think is the simple approach and have their insurance policies made payable directly to their child. This looks straightforward, but it can create a difficult and expensive problem.

Minors typically can't receive and manage significant sums of money on their own. In most states, a child is legally a minor until 18 (a handful of states use 19 or 21). Until the child reaches that age, an insurance company generally can't pay a large death benefit directly to them. Instead, the funds usually have to go through a court proceeding, and a judge would have to appoint an adult to hold and manage the money for the child.

That court-supervised arrangement usually continues until the child reaches the age of majority in that state. At that point, whatever remains in the account is turned over to the child outright, with no ability to stagger the payout or add oversight.

Naming a Custodian as the Beneficiary

A better alternative may be to name someone as “custodian” for the child under your state's version of the Uniform Transfers to Minors Act (UTMA). Nearly all states have adopted some version of the UTMA, though the details vary from state to state.

You'll need to check with the insurance company to confirm it will accept a custodial designation. The custodian manages the funds for the benefit of the child only and can't use the money for their own purposes.

Designating Your Child’s Other Parent as the Beneficiary

Many people, even when divorcing, choose to keep their ex-spouse as the life insurance beneficiary. If the purpose is to fund ongoing support for the couple's children, the surviving parent is generally understood to use the money in place of the child support the paying parent would have provided.

However, there are some potential downsides to this approach:

• The proceeds aren't shielded from the surviving parent's creditors and can be affected by bankruptcy.
• The funds could be accessible to the surviving parent's new spouse or partner.
• There is no legal guarantee the money will actually be used for the children.

Even so, many people choose this route because they trust their co-parent to use the money as intended for their children.

Avoiding a Windfall

Another issue to consider is the possibility of a windfall. This can happen if the paying parent dies not long before the child support obligation would have ended. One way to avoid this is to build in a decreasing schedule of required coverage, tied to how much support remains as the child gets older. This can typically be estimated in advance and built into the divorce settlement agreement.

Key Terms for Separation Agreements

The insurance term of a divorce settlement agreement should specifically address several things:

• Enforcement. If the paying spouse doesn't maintain the required coverage, the agreement should say that the surviving parent or child can make a claim against the paying parent's estate and that the paying parent's estate is responsible for attorney's fees incurred in enforcing the term.
• New policies. The agreement should say that any future life insurance policies are automatically treated as intended to satisfy the required coverage, up to the required amount.
• Proof of coverage. To prevent unilateral changes in beneficiary designations or coverage amounts, the agreement should require the paying parent to provide the other parent with annual proof of insurance coverage, such as a current policy summary and beneficiary designations.

Should the Recipient or Trust Own the Policy?

One way to prevent a paying parent from unilaterally changing the beneficiary designation is to have the “recipient,” such as the other parent, actually own the policy. The paying parent remains the “insured,” but the policy owner controls whether beneficiaries change. The question of who pays for the policy premiums is a separate question that would have to be addressed in the settlement agreement.