Updated By Lina Guillen,
As a result of divorce or a separation, many parents must make support payments for their child's living expenses and education until the child's emancipation. Child support helps divorcing couples achieve the goals they had for their children in the manner 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 that comes up for divorcing parents is: What happens if the "payor" parent (the parent paying child support) dies prior to the time the child support obligation is over? One way to ensure that child support payments will continue despite the paying parent's death is to secure those payments with a life insurance policy.
Many couples choose to secure their support obligations through life insurance. Some already have life insurance. Others, who are medically qualified, may obtain new life insurance coverage or increased coverage at the time of the divorce. Providing life insurance policies to cover one's support obligation is an excellent way to secure the costs of raising a child in the even of the paying parent's death.
The topic of support obligations following the death of the payor parent, with specific reference to life insurance, should be addressed in the separation agreement. What are the downsides to having the life insurance benefits paid to the child? What are the downsides/advantages of naming the surviving ex-spouse or 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 payor parent changes coverage while alive, or eliminates the coverage? What happens if the payor parent changes the beneficiary designations? These and other issues can be addressed in a properly drafted life insurance provision of a separation agreement.
If you have questions about using life insurance to secure child support, you may want to consult an experienced family law attorney who can advise you on this topic and draft the settlement agreement on your behalf.
Some couples take what they think is the simple approach and have their insurance policies made payable directly to their child. This seems simple, but actually creates a difficult and expensive problem. In Massachusetts, a child is considered to have reached the age of majority at age 18. The policy proceeds will need to be paid to a court-appointed guardian (probably the surviving ex-spouse). The guardian has the legal obligation to administer the insurance funds on behalf of the child until age 18. At that time, whatever is left in the guardianship account must be given to the child outright. If you think back as to how mature you were at age 18, you may want to reconsider naming the child as beneficiary of a life insurance policy.
A somewhat better alternative is to leave the insurance proceeds to someone designated as "custodian" under the Uniform Transfers to Minors Act (UTMA) for the benefit of the child. You will need to check with your insurance company to make sure it understands the designation, and will acknowledge the custodian as the beneficiary of the policy. The designation must be to the custodian for the named child (or children), and not be made to the child directly.
In Massachusetts, a properly-named custodian can hold the property for the benefit of the child until age 21, at which time anything remaining in the account becomes the property of the child. The custodian may not use the funds for him/herself, but only for the child. The funds can be used for the child's college education. For many couples, having the insurance funds held in a UTMA account will be adequate to meet the support needs and not provide too much money outright to a child prior to turning 21.
Many couples, even if separating or divorcing, wish to make their ex-spouses the beneficiaries of their life insurance policy. If the intent of the designation is to provide support for the couple's children, the surviving ex-spouse is under a moral duty to use the funds as per the separation agreement, that is, to replace the child support the payor spouse or parent would have provided.
However, there are some potential downsides to this designation. The proceeds from the life insurance policy are not protected from the ex-spouse's (or ex-partner's) creditors. They can also be affected by bankruptcy, and may be subject to claims of his/her present spouse. Further, there is no guarantee that the surviving spouse will use the proceeds for the children. Even so, this solution appeals to many people on the basis that they trust the ex-spouse (or ex-partner) to have the same desire to take care of their children in the event of the payor parent's death.
Another issue relevant to funding support obligations is that a windfall can exist if a large life insurance policy is paid out to secure a very small remaining amount of obligation. This can happen if the payor spouse dies a few years prior to the emancipation of the child. A way of eliminating this windfall is to have a decreasing schedule of required policy proceeds, depending on how old the child is. These can be figured out fairly easily by estimating the child support and educational cost contributions at various points. This gives the payor parent some flexibility in naming other beneficiaries as the children get close to emancipation.
Life insurance can also be used to secure alimony payments in the event of the death of the payor spouse. Even though alimony per se will end at the death of the payor spouse, the payee spouse can receive a substitute for the alimony payments he/she would have received by means of life insurance proceeds. This is often crucial support for the surviving ex-spouse. These policies can be paid to a trust (revocable or irrevocable) as with the trusts for the benefit of children.
The insurance provision of a separation agreement should specifically provide for a number of things. The agreement should state that if the payor spouse (or payor parent) does not leave the insurance policy proceeds as required by the agreement, whatever is missing will be brought as a claim against the payor's estate (as well as any other remedy provided at law, such as equitable claims and trustee actions) and that the estate must pay any attorney's costs incurred in enforcing this provision.
The separation agreement should also specify that if subsequent life insurance policies are purchased, they shall be deemed to be intended for the benefit of the payees (the child and/or the child's surviving parent) under the current separation agreement to the extent of the support amounts or policy face amounts required under the agreement. This means that the prior obligation cannot be avoided by buying new policies and canceling the old one. In order to prevent unilateral changes in beneficiary designations and insurance policy amounts, the separation agreement should state that the payor spouse must give the other party yearly proof of insurance coverage, such as a copy of the insurance policy and current designations.
One way to prevent a payor from changing the beneficiary designation of a life insurance policy is to have the "recipient" (the ex-spouse, ex-partner or trust for the benefit of children) own the policy. The payor would be the "insured," but the owner of the policy would have the right to change (or not change) beneficiaries. The question of who pays for the policy premiums could be addressed in the separation agreement.
Written by: Laurie Israel