Protecting Child And Spousal Support: Managing Risk With Insurance

If you are dependent on your ex-spouse for child or spousal support payments, it can be a good idea to cover the risk of their death or permanent loss of income by getting an insurance policy in place. Your children may be the beneficiary of their estate, and it is possible to collect child support payments by claiming against the estate. Still, there’s no guarantee the size of the estate will cover the amount you are owed in child support. Alimony payments would end on the death of your ex-spouse.

In addition, probate can be lengthy, and you’ll need to keep paying for all your usual expenses while the executor pushes the estate through the courts. 

Insurance can be an investment that pays off not just in money but also in peace of mind. There are two main types you want to consider, and we’ll get into the details of each. 

Life Insurance On Your Ex-Spouse

If you are the custodial parent, having a life insurance policy on your spouse makes sense. A term life policy is a type of insurance that is only in effect for a given period. It does not build cash value, and if the term lapses without a claim, the policy ends. Because it does not build cash value, term life is much less expensive than whole life policies that act as investments. Your child support payments will stop at some point as the child matures, so having a policy in effect for only that period makes sense.

The policy’s payout should be equal to the annual payments from your ex-spouse, plus any other obligations that they are paying for that are not child support payments (for example, education expenses or promises to cover athletic training). The amount of these payments is called an “insurable interest” by the insurance company. Essentially, the company has to determine that you have a financial interest in your ex-spouse before writing a policy covering it. 

Multiply this by the number of years you’ll need the policy to get the total payout. For example, if your youngest child is 5, and your spouse is obligated to make payments until age 23, multiply the annual amount by 18 to get the total. 

While your divorce agreement may specify that your ex-spouse must carry life insurance, it can be challenging to ensure that in practice. And since the policy will cancel if the payments are not made, you may want to pay for the policy yourself. If you do decide to become the “payor” – the person paying the bills – always ensure you are also listed as the “owner.” Otherwise, you are just the beneficiary, and beneficiaries can be changed. If it’s not possible to be the owner, specifying that you are an “irrevocable beneficiary” means that the beneficiary cannot be changed without your consent. It doesn’t provide full ownership control, but it can be an effective solution.

Your ex-spouse will need to know about the policy, and they may need to get a physical and/or provide medical history. They will also need to give consent and sign the policy. 

Disability Insurance Protects You From Potential Modifications

Everyone should have disability insurance, but when you are dependent on your ex-spouse for child support or alimony, you have a nuanced need. 

First, even if the relationship is amicable and your spouse is committed to providing for his children, disability insurance protects you from disruption. If he is a salaried employee, a short-term disability will likely be covered by his workplace with no interruption. However, if he were to have a significant injury that impaired his ability to work long-term, income would likely be reduced. This would necessarily result in the spousal support order being modified.  

Disability income insurance policies don’t only payout if someone is permanently disabled. A policy with a “true own occupation” definition of disability will pay benefits if the individual can no longer perform their chosen occupation’s material and substantial duties.

For example, physical or mental health issues that disrupt work could be covered by a disability policy. This would potentially replace part of their income and allow them to continue making the agreed-upon payments to their ex-spouse.

While the ex-spouse may have an employer-sponsored group policy ork that provides for disability, relying on this has risks. The policy may not be portable if they were to change jobs, and the process would have to begin all over again. 

Setting out a portion of the alimony payment for the disability income insurance policy can be part of the divorce agreement. The court order should state the policy cannot be discontinued or changed.

The Bottom Line

Protecting child support or alimony payments with appropriate insurance should be part of your plan. It can be relatively affordable to get the level of coverage you need, even if you need to pay for it yourself.