by: Melissa Stewardson, Financial Security Advisor
If you or your former spouse were to pass away, would your kids be okay? While the obvious answer to this question, from an emotional perspective, is a resounding “NO!”, you can take steps to protect your children financially in the event of tragedy.
The decision to separate or divorce, the “end” of the marriage/common-law relationship, is often the beginning of a different “relationship” between the separating couples - especially if they have dependent children and ongoing obligations to one another to pay child or spousal support.
Guaranteeing Ongoing Child/Spousal Support
It is very common to have a term in a Separation Agreement and/or Court Order that requires separating parties to guarantee support payments in the event of death, illness or disability of a support payor. This is a very important term to include within separation documents. Unless an Estate has the assets available to pay, support payments may stop upon the death of the payor, and eventually could lead to Estate litigation. This would cause additional stress, conflict, and worry, not to mention legal fees!
There are a number of ways to guarantee that support would be paid in the event of the death, illness or disability of the support payor, including life insurance, disability insurance, and critical illness insurance.
Many people have life insurance coverage available through employer benefits. It is important to understand that this type of coverage is not guaranteed to be in force for any defined period of time, nor for any specific monetary value. This means that the insured person (i.e., the employee) is not the owner of the policy, and has no control over coverage levels - amount of life insurance coverage could be changed, or even be terminated, at any time! Additionally, if a person were to change jobs, they would also lose the coverage associated with their former job. It is very important to have an individual life insurance policy, that you, as the policyowner, have complete control over.
The most cost-effective way to protect ongoing support payments is to purchase a term life insurance policy. Term life insurance is a very affordable way to ensure that debts and other financial obligations would be paid/addressed in the event of death. Term insurance offers coverage for a defined period of time, usually in 10, 15 or 20-year terms, and, generally, have a consistent monthly or annual premium for the term of the policy. As an example, a healthy, non-smoking 40-year old male could obtain a 20-year term policy in the amount of $250,000.00 for less than $30.00 per month*.
It is very important to take steps to have a life insurance policy put in place as soon as possible during the separation process. Some couples take years to finalize a Separation Agreement, or to make their way through the Court system, and during that time a party could become uninsurable.
In the case of life insurance that is intended to replace child support obligations, it is critically important to ensure that the beneficiary designation is irrevocable. This means that changes cannot be made to the beneficiary designation, or the policy/coverage terms without the consent of the irrevocable beneficiary. It is important seek advise from your legal representative with respect to having a Separation Agreement/Court Order specifically require that any life insurance placed in order to protect support payments have a beneficiary designation that is “irrevocable”.
Disability and Critical Illness Insurance
Disability insurance is insurance on the income stream of an individual and their ability to earn an income, and pays a monthly benefit to a policyowner, ensuring a continuing income. Critical Illness insurance generally pays a lump sum benefit to the policyowner upon the insured party being diagnosed with a critical illness.
In Canada, child and spousal support payments take income into consideration when determining entitlement and amount of payment. In many cases, it is wise to have disability and critical illness insurance coverage for both parties. In the event of disability or critical illness, income may decrease or even stop, and in some circumstances could be considered non-taxable. This could have a significantly alter support entitlement/obligations. Protecting income stream is a crucial consideration for separating spouses, whether they are the payor or recipient.
Life, disability and critical illness insurance are important considerations and an integral part of the separation and divorce planning process. Each case is different, and it is important that you discuss your individual circumstances with your legal and financial advisors.
A licensed life and health insurance professional will work with you do a complete financial needs analysis and make insurance coverage recommendations that are the right fit for you.
If you are going through a separation and feeling overwhelmed about the financial decisions you have to make, please feel free to reach out to me. I offer a free consultation and review of your current life insurance plan and perform a comprehensive financial needs analysis. I work closely with lawyers and other professionals to ensure that you are taking steps to rebuild a solid future.
Melissa Stewardson Financial Security Advisor, offering Life, Health, Group Insurance and Investments Desjardins Financial Security Independent Network