Q: After 24 years of marriage, my husband and I are divorcing. Our lawyers are in the process of drafting our separation agreement. Our two kids are young adults now so there are no child support requirements, but I spent years at home with them when they were young, so I’ll get monthly support payments from my ex until he turns 65. Nearly 20 years ago, we purchased life insurance on my husband in case he died and I was left with a mortgage and young children. We just received a letter from the insurance company telling us the term-20 renewal is due, and the monthly cost for the insurance is going up. Should we cancel the policy because our kids are grown now, or is there a better option?
A: There are number of items that you and your spouse ought to consider with respect to this life insurance policy, in light of your new marital status.
One use of life insurance is to cover the financial risk of death. When your children were wee ones, the insurance would have replaced your husband’s income and/or been used to reduce or eliminate the mortgage. The relatively small cost of the insurance would have covered the large financial impact on your young family had he died prematurely. Because your children are 20 years older now, the original need for that life insurance may no longer exist.
Another use of life insurance is to fulfil a financial commitment made by the insured. In your case, your soon-to-be-ex-husband has a financial commitment to you in the form of monthly support payments. That obligation exists whether he exists or not. If he were to die prior to age 65, how would that financial liability to you be satisfied?
There might be sufficient assets in his estate to cover this commitment, but he may wish that someone other than his ex-wife be his beneficiary.
A guaranteed way to satisfy that financial liability in case of his death is life insurance. And, coincidentally, he already owns a policy.
Separation agreements often stipulate that life insurance is required to cover this specific risk. Check your draft agreement to see if it was included or discuss with your lawyer how you could use your husband’s current policy for this purpose.
The separation agreement would name you as the irrevocable beneficiary and you would both sign a Beneficiary Designation Form, so your ex-husband could not change the beneficiary without your written consent.
If he lives until age 65, he will provide the required support payments directly to you monthly. If he dies prematurely, then you will receive a lump-sum, tax-free death benefit from the life insurance, effectively replacing the monthly support payments without encumbering his estate with this financial responsibility.
The notice you received will indicate that the insurance renews for another 20 years at the guaranteed price in the original policy, which will take him to age 70. Your husband’s financial obligation to you is for the next 15 years, until he is 65, so the 20-year term will more than satisfy that. He does not have to reapply or provide any medical information. This is beneficial because he may have had a negative change in his health in the last 20 years, which could prevent him from applying for a new insurance policy to satisfy his support payment obligation.
When your ex turns 65, you will relinquish your irrevocable beneficiary status and he can then determine what he wishes to do with the insurance policy and beneficiary designation.
Electing you as the irrevocable beneficiary on this renewing 20-year term life insurance policy is a simple and amicable way to guarantee the fulfilment of your support payments — and protect your ex-husband’s estate — if he were to die before his financial obligation to you ceases.
Author: Thie Convery
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Retrieved from: Thespe.com
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