Life Insurance
Why are insurance policies important when parents separate?
Insurance policies are important because it allows a safety net in the case if one of the payor parents pass away. This protects the other parent so they still receive support payments for the child and/or themself.Â
Are payors of child or spousal support required to maintain life insurance?
It is not automatic. It must be agreed upon in a separation agreement or ordered by the court.
What is the purpose of the insurance?
Insurance secures the support obligation in case the payor dies. The life insurance ensures the children or former spouse continue to receive financial support after the payor’s death.
What is the legal basis for forcing a payor to maintain life insurance?
Section 34(1)(k) of the Family Law Act gives the court the discretion to make a interim or final order “requiring the securing of payment under the order by a charge on property or otherwise”. This section is broad enough to permit a court to order a party to maintain life insurance and designate a beneficiary to cover support obligations. The Divorce Act also gives courts the discretion to secure child or spousal support
If you name your ex as the beneficiary on your life insurance, can I change this to my children?
You can set up a trust and the trust can be named as the beneficiary on your life insurance. The designated trustee will transfer the proceeds from the insurance policy to the children named as beneficiaries. The proceeds can be paid out as a lump sum or a series of smaller payments depending on the wishes of the policyholder.Â
Who is the beneficiary of the insurance plan?
The payor parent has the option to choose who they want their beneficiary of the policy to be, either the surviving parent or the child or a trust set up to their benefits. The funds from the insurance can be used for any use for support obligations even if the payor parent is not around. Life insurance policies can reduce any financial issues that can occur due to the payor parent death. It can help cover for any expenses, childcare, education, healthcare, or any other needs for the child.Â
Can a judge require a person to obtain life insurance post separation?
A judge might ask one spouse to apply for life insurance if they have an ongoing financial obligation to the other and the means to pay for a life insurance policy.Â
What are some of the common terms in an order or separation agreement?
- Set Amount: payor must maintain a specific policy value (e.g. 250,000) that will cover total amount payable
- Beneficiary Designation: beneficiary must be the support recipient or child
- Duration: policy must be maintained as long as support is owewd
- Proof of Policy Maintenance: proof of policy must be provided annually
What are three possible ways of structuring an insurance policy, including advantages and disadvantages of each approach?Â
Some important questions to bring up when addressing on considering with proceeding with the issue are:
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Advantages |
Disadvantages |
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Having the ex spouse/ surviving parent as the beneficiary |
The advantage of designating the insurance to the ex-spouse or surviving parent as the beneficiary will ensure that the support obligations continue even after the death of the payor parent. |
The disadvantage to this is that the policy will most likely not protect the ex-spouse from any claims from the present spouse or creditors. |
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Having the child as the beneficiary |
The advantage of having the child/children as the beneficiary is that it is complicated. The guardian can administer the funds on the child’s behalf until they are 18 and whatever is left over in the account must be given to the child when they are 18. |
The disadvantage of this is it is difficult and expensive. And the policy proceeds will require you to pay to a court-appointed guardian which will likely be the surviving ex-partner. |
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Putting the insurance policy in a trust |
The advantage of this is that it adds more protection and control over the payor parent’s funds. And this gives assurance knowing that the support obligations and funds are still being taken care of, for the best interest of the child. |
The disadvantage is this prevents the payor parent from changing who the recipient is. Only the owner of the policy would have the right to make changes or not on who the beneficiaries should be. |
What are alternatives to an insurance policy to cover their support obligation?
Another alternative is to pay a lump sum. If they do not have the cash to pay the lump sum, they can make their ex a beneficiary of one of their investments. If the paying spouse dies, the balance of owed spousal support or a designated amount of life insurance is the first obligation against the estate. The agreement can also protect a person if they no longer receive support, life insurance is no longer available through employment, or monthly premiums increase significantly.