Divorcing spouses and parents have varied life insurance needs. Whenever one or more persons are financially dependent on another’s earnings there is what the life insurance industry refers to as an insurable interest. In families of two married parents with young children the primary wage earner often has life insurance coverage equal to several years earning. The benefit to the financially dependent spouse and the children is obvious. The benefit to the insured party is the peace of mind that comes from knowing your loved ones are provided for in all events. Often both spouse carry life insurance coverage because both are employed or, if one is not employed, the stay at home spouse is providing services that would have to be purchased in the event of her, or his, untimely death.
Upon divorce in families with children there is still the same basic economic need for life insurance coverage to protect the child support payments. The children generally would be the beneficiaries of the policy – directly or through a trust. The insured still benefits from knowing his loved ones will be provided for. Life insurance proceeds paid during the insured’s children’s minority would be needed and would benefit the insured’s children just as they would if he or she died while the children were minors and the insured was married to the other parent at death.
But the dynamic is different in divorce. The insured views the insurance coverage as benefiting the future ex-spouse. Often there is hard bargaining around how much insurance coverage there will be, how long it will be in place or how quickly it decreases, and whether the spouse can be the trustee of the trust to which the insurance proceeds are paid. I’ll explore this further in future posts.