The divorce is almost over. You have finished negotiating alimony. Child-support has just been calculated and you have finally figured out who is going to take Aunt Millie’s china. The end of the stressful negotiations with your almost ex-spouse is almost at near when your attorney turns his or her attention to life insurance. It’s probably the last thing you want to hear about. Particularly if you are a relatively young individual, this is just one of those “lawyer details” that you really don’t want to pay attention to.
Unfortunately, this is one of the most over-looked issues which can come back to haunt litigants. Tragedies do happen, and when there is an unexpected death, it can have a monumental impact on property settlement agreements, particularly when a settlement contains provisions relating to child support and of children and college expenses. No one wants to think about death, and certainly most people don’t want to think about it when they are already in the process of grieving the end of a marriage. However, not having protection against the possibility of one parent or former spouse dying can be catastrophic for the survivors later on.
When alimony is involved, your attorney can make an educated guess as to how long a client will be paying or receiving alimony based upon the terms of the agreement, or in the case of open duration alimony, the expected lifespan of the parties, and expectations of retirement date. Certainly, events such as remarriage or loss of employment can affect this, but generally, you can get a pretty decent idea of how long the term of alimony will be. The appropriate amount of life insurance can then be calculated by taking what is known as a present value to come up with an amount that is necessary to make sure the receiving party is being taken care of. Additionally, as time goes on the amount of the alimony obligation may be lower, and the remaining term less. A settlement agreement should provide for the reduction of the life insurance obligation as well. For example, a paying person who has to pay alimony in the amount of $3500 per month may have to reasonably obtain $500,000 worth of alimony at the beginning of what is expected to be 15 years of paying. This way, if the paying client dies in year 2, the receiving party will have the benefit of the alimony for the expected period. When five or six years have passed, however, the paying person may be able to reduce the alimony to $400,000.
As for child support and college, the parties need to make an educated guess as to what it will take to get the children to emancipation, which is loosely defined in New Jersey as how long will it be until the child graduates college, a trade school or otherwise becomes self-supporting. When child-support is involved, and it is likely that the children will attend college it is important to think about all of the expenses that the surviving parent will have. It is very easy simply to assume what the cost of tuition room and board will be and use that to determine an amount of life insurance. However, parents need to remember that in addition to the direct college expenses, the child will have all of the other expenses that they had before they went to college such as clothing, the need for an allowance for incidentals. On the home front, expenses don’t go down significantly. There is a reduction in the grocery bill, and a little less electricity and water in the custodial parent’s house. Making sure there was enough life insurance to cover these expenses as well as the tuition is important. Is it likely that the college the child chooses will be somewhat local that the child will need a vehicle?
Nobody has a crystal ball, and therefore it may be useful to assume college will stretch out to five years rather than four. Then, based upon that number, what percentage does the parent who’s going to have a life insurance obligation expect to pay? For example, suppose parents are getting divorced and have a 14-year-old college bound child and the noncustodial parent is going to be paying $300 a week in child support plus 60% of unreimbursed health care expenses and agreed upon extracurricular activities. Let’s further assume that that child support obligation is going to continue through college for a total $125,000. Add in that parent’s obligation for agreed-upon extracurricular activities and health care expenses for another $25,000. Finally, assume that the parent is going to be responsible for 60% of college expenses which is estimated to be $75,000 per year. That 60% over an anticipated five years of college now equals $225,000. Now we know that noncustodial parent is going to pay somewhere around $375,000 through emancipation.
An additional issue that has to be discussed at the time of settlement or trial is, what are the expected premiums going to be throughout the course of the obligation? At the time of their divorce, a litigant may be somewhere in the middle of a term of life insurance with a reasonable premium. They don’t realize that while the obligation to maintain life insurance may be ongoing, the premiums may increase substantially based on age and any health issues that arise. Setting a cap on the amount of premiums may be something to consider, particularly if there are any health issues involved.
Finally, what happens if one of the parents is uninsurable as a result of existing health conditions or some other circumstance? Making sure that any retirement survivorship benefits are appropriately allocated is one important possibility. Purchasing an annuity may be another. Finally, if there is property and the uninsurable parent’s estate is significant, the surviving parent should be made beneficiary of the estate. The settlement agreement should also state in this event that any transfers made in anticipation of death to avoid the obligations under a settlement agreement should be deemed fraudulent and reversible.