Life Insurance: Protecting Support Obligations after Death
What are the insurance implications when one party has a spousal and/or child support obligation to the other? It is common practice to require the payor spouse to designate the recipient spouse as the irrevocable beneficiary of a life insurance policy. This is done either by agreement or by a court order. The minimum required face value of the life insurance policy is set at an amount large enough to ensure that the payor’s support obligations are fully covered in the event of the payor’s death.
While this life insurance clause is often added as a standard and given very little thought, it is in fact a very important clause that financially protects the dependent spouse and/or children in the event of the supporting spouse’s death. However, recipient spouses should not be lulled into a false sense of security simply because an insurance clause has been added to a court order or separation agreement. There are some important issues that spouses should be aware of in order to ensure that they and/or their children are properly protected.
First, just because a court order or agreement requires one spouse to name the other as an irrevocable beneficiary of a life insurance policy, this does not mean that the payor spouse will actually take this step. It is wise to also require, as part of the court order or agreement, that the payor spouse provide within a reasonable timeframe proof of the policy and of the irrevocable beneficiary designation. Even with this clause, some recipient spouses fail to follow up or to ensure that the beneficiary designation is, in fact, irrevocable. If the designation is not irrevocable, the payor spouse can change it at any time, without notice to the recipient spouse.
Another issue is that the payor spouse may let the policy lapse by failing to pay the monthly or annual premiums. This can come as a surprise to the recipient spouse, who may not find out about the lapse in policy until after the payor spouse has passed away. One possible remedy is to have the recipient spouse responsible for making the premium payments, with some or all of this cost added to the payor spouse’s monthly spousal and/or child support payments.
Sometimes it is not possible, due to the payor’s health or age, for the payor to obtain life insurance. The courts generally require a payor to use his or her “best efforts” and will generally not enforce an obligation to obtain life insurance if it is impossible to obtain, or if the premiums are too high.
Even where the payor spouse does maintain a life insurance policy and does name the recipient spouse (or children) as the irrevocable beneficiary of the insurance policy, the recipient spouse may be required to share the insurance proceeds with other dependents, such as a second spouse or other dependent children of the payor. This was the case in Dagg v Cameron Estate, where the payor husband had designated his first wife as the irrevocable beneficiary of his $1 million life insurance policy, but then entered into a second relationship with a woman who became pregnant with the payor husband’s child. When the husband died, the second woman sought a portion of the life insurance proceeds for herself and her child, because they were financially dependent on the payor husband at the time of his death. The court agreed, and held that the insurance proceeds were available for all dependents of the payor spouse who were not otherwise properly financially provided for at the time of the payor’s death.
The court’s ruling in Dagg has been appealed and we are awaiting the result to see if the court’s ruling will be upheld. However, one possible way for a recipient spouse to avoid sharing the proceeds of the payor spouse’s life insurance with other dependents may be for the recipient spouse to be the owner, or at least a joint owner, of the life insurance policy.
Where a payor spouse does not have life insurance at the time of his or her death, or if the recipient spouse and/or children are not named as beneficiaries, the recipient spouse and/or children may still be able to claim compensation from the deceased spouse’s estate if they have not otherwise been adequately provided for financially.
For more on claims like these, see our previous blog post “'Til Death do you Part…but not Really: Family Law Obligations Placed upon Estates”.