Despite the best intentions, marriages don’t always last forever. Divorce ranks as one of the most stressful of life’s events. Because it often involves change in every conceivable area of life, it usually requires a fundamental reexamination of future goals and expectations. In the midst of the immediate financial and legal concerns, couples need to look beyond the present to help ensure that their financial futures are secure and that the future needs of their children, such as education expenses, will be provided for in the event of death. Life insurance may offer a solution.
The future educational expenses of college-bound children are growing. According to The College Board’s annual report, Trends in College Pricing—2009, the average sum of tuition, fees, room, and board for the 2009–2010 school year was $15,213 at public colleges and $35,636 at private colleges. Because educational expenses are only expected to increase, the need to plan for future financial security during divorce becomes even more paramount. Let’s look at several different scenarios.
After divorce, if the spouse paying alimony and/or child support were to die, then the custodial parent may be hard-pressed to maintain the children’s current lifestyle, let alone be able to afford the potentially significant college fees. On the other hand, if the custodial parent were to die, the ex-spouse may be at a loss to cover daily childcare expenses. For these reasons, divorcing couples may want to consider making life insurance policies part of the divorce decree.
A custodial parent may want to look into purchasing a life insurance policy on his or her ex, but if this turns out to be impossible, transferring ownership and beneficiary arrangements on an existing policy may be another option. If policy premiums exceed the budget, the custodial parent may request alimony or child support increases to cover the costs. If the non-custodial parent remains the policy owner, the divorce decree can include arrangements to ensure that the custodial parent is named as the irrevocable beneficiary and receives ongoing proof that the payments continue to be made and the policy remains in effect.
A parent without custody may wish to keep the policies he or she already has to protect the financial interests of other family members, such as children from a new marriage. In this case, the non-custodial parent should consider purchasing a new policy on his or her life with the ex as the owner and beneficiary. If this is done before or during the divorce proceedings, gift tax will not be owed. Premiums may be tax deductible as alimony if policy ownership belongs entirely to the former spouse.
For existing policies, it’s important to remember that the insurance company must be notified of any beneficiary changes: Using a will for this purpose will not be valid. In addition, should the insured remarry and the policy name the “husband” or “wife” of the insured as the beneficiary, the new spouse may receive the proceeds. If the insured does not remarry and the same policy language is in force, then the proceeds may be paid to the secondary beneficiary. If the insured’s estate is named as the new beneficiary, insurance proceeds will likely be held up in the probate process. If minor children are named as the new beneficiaries, additional problems may arise, as insurance companies generally will not pay minors directly. For this reason, it may be a good idea to create a trust for minor children and name the trust as the beneficiary of the policy proceeds.
Laws vary from state to state, so consult with an insurance professional. Divorce is rarely easy, but with a well-planned strategy, the short- and long-term financial needs of the children can be ensured regardless of life’s unexpected turns.
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