Career Coaching While Going Through a Divorce

BLOG

Court Mandated Life Insurance for my Ex – What Kind Do I Buy?

Written by guest writer, Christine Cox-West, The Fortis Agency

Business man in a meeting pointing at paperLast year I received a call from a client. He seemed upset and told me he and his wife were getting divorced, and he asked me about changing the beneficiaries on his life insurance policy. My immediate response was, “Before you do anything, discuss it with your attorney first.” In the likely scenario that he was going to be required to make alimony and child support payments to his soon-to-be ex, life insurance would be a key financial tool to ensure these payments would be made in the event of his untimely death.

The reason for life insurance is simple: If a paying ex-spouse passes away, the payee would still need those payments to continue without substantial financial repercussions. Often when life insurance is required, the alimony paying spouse will purchase cheap term insurance with a term similar to the amount of years they are required to make payments. For example, if a spouse will need to make alimony payments for 18 years, they may purchase a 20-year term policy. If that individual has good cash flow, implementing a cash value life insurance policy instead of term may help them recoup those premium payments they were (probably begrudgingly) making.

Here’s an example: Let’s assume John and Mary are going through a divorce. They are both 45 years old. Mary was a stay-at-home mom, which gave John the flexibility to invest time and money into his business. When they divorce, Mary is awarded $10,000 per month of alimony for the next 20 years. Mary’s attorney explains that if John passes away one month into making his alimony payments, there’s almost $2,400,000 of alimony payments Mary won’t be receiving. Therefore, John must carry a life insurance policy for $2.4M.

If John purchases a 20-year term policy for $2.4M, he’ll end up spending nearly $84,000 over the next 20 years[1]. He’ll have nothing to show for it, and his policy may lapse at that point. If John is earning significant income and has good cash flow, however, he can choose another option. If he instead chooses a “cash value” life insurance policy, he would spend around $940,000 in premiums over those 20 years, but based on current dividends of these kinds of policies, his cash value could be $1,203,000[2] and he’s ahead $263,000 instead of down $84,000. That’s a $347,000 swing. At this point in time, John can decide what he wants to do. If he surrenders the policy, he could take the cash. He would incur a tax on the $263,000, but hey, he’s still ahead.

The more likely scenario is that John chooses to keep the policy. He can choose to stop paying the premiums and redirect the annual dividends to pay the premiums. He can also use the policy to supplement his retirement income in a tax efficient manner by taking distributions from the $1.2M in cash value.

There are additional benefits too: If John becomes disabled during those 20 years, the policy premiums could be waived. This means at age 65, the cash value will still be there. Cash value insurance can be used as a piece of a well-structured financial plan and can also accomplish long-term care planning, estate planning for a future spouse, or to leave a legacy for children. This solution isn’t for everyone but could work very well for some.

Regardless of whether cash value life insurance is appropriate based on cash flow and net worth, life insurance plays an important role in protecting alimony payments. Unfortunately, this year I received a call about the same client I spoke of earlier. He passed away during his divorce. He was young, and he was a great father. At the end of the day, it didn’t matter what he would have been asked to do in the divorce decree. He wanted his death benefit to go to his ex to help take care of his children. Because he didn’t make a rash decision last year by changing the beneficiaries, no one had to go to court to fight for the death benefit. The mother of his children received the benefit, and the financial burden of his loss will be relieved. Whether cash value or term, life insurance is critical to protect alimony payments.

 

[1] Based on a 2019 Illustration of Mass Mutual’s 20 Year Term Product of a 45 Year Old Male with a Select-Preferred Non-Tobacco Rating with Waiver of Premium.

[2] Based on a 2019 Illustration of Mass Mutual’s Legacy 100 Whole Life Product of a 45 Year Old Male with a Select-Preferred Non-Tobacco Rating with Waiver of Premium.

Christine Cox-West, The Fortis Agency, began her career in financial services in 2011. Within a short time, Christine recognized that protecting her clients’ incomes was the most important thing for anyone in the accumulation phase of their life.  After working specifically in the physician market, Christine became a disability specialist for one of the largest disability carriers in nation. Helping not only the clients, but also hundreds of other advisors find the right solutions for their clients, Christine gained immense passion and experience in the disability insurance marketplace. Christine is the NJ Chapter President of Women in Insurance and Financial Services (WIFS) and sits on the chapter board of Society of Financial Service Professionals (SFSP). She also sits on the board of the Morris County Chamber of Commerce among many Fortune 500 Executives.

Divorce Guide
About DeTorres and DeGeorge Family Law

DeTorres and DeGeorge Family Law is a New Jersey based family law firm that has been helping New Jersey residents achieve the best possible results in their divorce for nearly 30 years. The DeTorres and DeGeorge Family Law team is always ready to fight for their clients’ rights – determined to help New Jersey families overcome legal challenges from start to finish. Our legal team, with over 65 years of combined experience, provides expert guidance on all family law and divorce-related matters, including custody and parenting time, alimony and child support, equitable distribution of assets, premarital agreements, post-divorce issues, executive compensation distribution, divorces for business owners, and divorce mediation. The firm has been recognized for its dedication and expertise in the industry by multiple local and national organizations, including Super Lawyers, Law Firm 500, and the American Institute of Family Law Attorneys. Rosanne DeTorres, Managing Partner, is one of 150 lawyers certified as a matrimonial law attorney.

Erin D. DeGeorge
Erin D. DeGeorge joined DeTorres & DeGeorge, LLC as partner to the firm in June of 2010. Prior to joining DeTorres & DeGeorge, Erin was associated with the national firm of Fox Rothschild LLP and Cutler, Simeone, Townsend, Tomaio & Newmark, LLC...
Share on:

knowledge & insights

Spousal support, maintenance & alimony in a same sex divorce.

Spousal Support, Maintenance & Alimony in a Same Sex Divorce

Many same-sex couples ask us to explain how same sex spousal alimony works in New Jersey. They want to know whether the rules about how much same sex spousal maintenance might be and how long same sex divorce spousal support might be paid are the same as for heterosexual couples.   In...

September 17, 2020 Read More

You can absolutely file for divorce due to domestic violence under the “extreme cruelty” ground for divorce.

SEPARATION & DIVORCE AFTER DOMESTIC VIOLENCE

During COVID, there has been an exponential increase in the number of domestic violence and divorce cases. We know that partners and spouses who are cooped up in the same home for a long period of time provide a breeding ground for poor behavior to turn into domestic violence. We often see victims...

September 15, 2020 Read More

Same sex couple discussing second parent adoption with child

Second Parent Adoption

A second parent adoption is a legal procedure that allows a same-sex parent, regardless of whether they have a legally recognized relationship to the other parent, to adopt her or his partner's biological or adoptive child without terminating the first parent’s legal status as a parent. Married...

August 13, 2020 Read More

Divorce: The Answers you Need – Before, During & After

Download our eBook today!

  • This field is for validation purposes and should be left unchanged.

Newsletter

  • This field is for validation purposes and should be left unchanged.
follow us
Top