Written by guest writer, Christine Cox-West, DoctorDoctorDI.
Last 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. 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 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.
 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.
 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, DoctorDoctorDI, 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.