Divorce is a stressful time and if you are contemplating divorce or about to sign your separation agreement, make sure you have reviewed your life insurance to ensure that it meets your financial needs.

When you are married, you buy life insurance to cover existing liabilities and income requirements if one of the spouses dies. The life insurance benefit could be used to pay off your mortgage or create an additional source of income for your family.

If you are getting divorced and you are the spouse that is receiving spousal support and/or child support, you have many financial concerns. What would be the purpose of holding life insurance, you may ask? Life insurance is used to protect the income that you receive from the spouse who is making the spousal or child support payments. The life insured would be the spouse who is making the payments and the beneficiary would be the spouse who is receiving support payments. In this manner, the spouse receiving support payments could use the life insurance proceeds to take out an annuity or invest the proceeds to create an income stream.

It is crucial to look at ownership issues regarding the life policy. The owner of the policy can change the beneficiary at any time and could also stop paying premiums and lapse the policy, without the beneficiary being aware of this. If there are cash values in the policy, the owner would be able to take out loans or partial withdrawals and this may impact the death benefit.

A solution to the issue of ownership is to have the spouse who is receiving support named as the owner of the policy, while the spouse with support obligations will be the life insured. The beneficiary of the policy will be the spouse who is receiving payments. The ex-spouse will pay the premium for the policy and there could be a clause in the separation agreement stating the obligation to keep the insurance in force and pay the premiums. Alternatively, the premium payments could be paid by the receiving spouse and the support payments could factor in this amount.

If the ex-spouse is the owner of the policy, you could have a signed letter of authorization stating that you have access to policy information at any time. However, you still run the risk of the policy lapsing if premiums are not paid and you may be unaware of any changes as far as beneficiary designations as well. To avoid this happening, you should be named as the irrevocable beneficiary. You could include provisions in your agreement to state that you and your children would be entitled to part of your ex's estate that is equal to the death benefit you would have received from the lapsed policy, but what would happen if the estate value is not significant or insufficient to cover the policy value?

Another consideration is how long the life coverage should be maintained. If the policy is held in place to cover spousal support obligations, the policy should be held till the time spousal support payments stop. If the policy is held to cover child support payments, the policy could be held till the child reaches an age of majority. At this point, if the owner of the policy is the custodial parent, ownership could be changed to the ex-spouse. The ex-spouse could look at his or her own life insurance requirements and may consider converting the policy to one that is more permanent in nature. This becomes even more valuable, if there has been a change (for the worse) in the medical condition of the life insured.

So, what kind of life insurance would you purchase to protect your spousal and child support obligations? You would probably look at buying term life insurance rather than whole life polices. Term life policies are generally cheaper than permanent life policies. If you have a life time obligation to pay support, you may consider holding a combination of permanent (term 100) and shorter term policies (term 10 and term 20).

If you have an existing policy and your ex-spouse has remarried and there is sufficient income in the household to raise your children, you may consider changing the beneficiary of your policy to your children. If your children are still minors and under the age of 18, you will have to name a trustee who will oversee the investment and allocation of the death benefit, till the children reach maturity.

Before signing that agreement, think carefully and insure well.

Joyce Owen is a certified financial planner and financial divorce specialist with Brophy Financial Planning and Insurance Agency and is registered with Dundee Private Investors Inc. (DPII) in Ottawa. Insurance products are provided through Dundee Insurance Agency Ltd. (DIAL). Please call 613-728-9573 for a free consultation or if you have questions. The statements and statistics contained herein are based on material believed to be reliable but we cannot guarantee they are accurate or complete. The information and opinions contained in this newsletter are obtained from various sources and believed to be reliable, but their accuracy cannot be guaranteed.

This newsletter is solely the work of Joyce Owen, for the private information of her clients. Although Joyce is a registered Mutual Fund representative with Dundee Private Investors Inc. ("Dundee Private Investors"), this is not an official publication of Dundee Private Investors. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessarily those of Dundee Private Investors. Dundee Wealth Management is a DundeeWealth Inc. Company.

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