Life Insurance Follies . . .

If, at the end of your divorce, one spouse will need to pay alimony or child support, there is a good chance the Judge will require the payor to also "secure" that obligation with life insurance coverage and to pay the cost.

It's nonsensical, if you ask me. But no one cares what I think.

Now before you start screaming at me about the importance of child support or alimony, remember what we're talking about here. Life insurance continues a stream of payments (in the form of a lump sum) after a person dies. Not while they are alive.

I fully support (no pun intended) a former spouse or kid getting the money they need to make it in this world. It's a tough out there. My problem is with the way the system does it.

Child support and spousal maintenance are supposed to end when a payor dies, not continue until the receipt doesn't need it anymore. In no sense can that kind of payment be based on a person's income. Dead people don't work.

And while we're on the subject, the law already provides a mechanism for minor children to make a claim against a deceased parent's estate. If the parent had money or wanted to provide for them, they'd stand at the front of the line.

If you ask someone why the law works this way, they'll just get upset, wave a hand at you, and say you're being ridiculous. But they won't give you a substantive answer. They can't. The law doesn't even pretend to take this cost into account when calculating guideline support.

Please don't misunderstand what I'm saying here. Whenever I represent a former spouse or custodial parent, I make sure there is life insurance in place. Most people can't afford to be single parents.

A better way to handle it, though, is to make the recipient spouse: (1) the policy's beneficiary; (2) the policy's owner; and (3) the person obligated to pay the premium cost. The payor spouse is only the "insured." In alimony cases, this cost is simply added to a persons' budget and addressed upfront. 

Why is this better?

First, it solves the annoying problem of confirming that the life insurance coverage remains in place. Beneficiaries are constantly worried that an ex-spouse will not pay premiums and let a policy lapse. And for good reason. How much time would you spend protecting your ex-spouse's rights? Making the recipient a policy's owner allows them to communicate directly with the insurance company to ensure nothing falls through the cracks.

Second, requiring the recipient to pay the premiums best allocates the risk vs. cost problem. Life insurance products are not all the same. There is risk in all scenarios. Sometimes, an employer-sponsored term policy can seem like the cheapest option at first, but it can turn out being very expensive if a replacement policy must be found because a payor loses a job, gets too old, or becomes uninsurable. The recipient is best positioned to decide the appropriate policy based on their risk tolerance. 

Third, as both the beneficiary and the one who must pay the premium, only the recipient has the incentive to investigate alternative coverage options that might better meet the family's needs.

For example, if a policy insures both maintenance and child support, sometimes the cheapest option is to "ladder" a few small term policies. Other times, whole life is better. But never in my career have I seen a person choose whole life. What a shame!

Finally, it's fairest that the person who benefits from an insurance policy be the one who actually pays for it. Otherwise, an ex-spouse has no incentive to decrease unnecessarily high death benefits, hoping instead for a windfall.

That's my two cents anyway.

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