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Using Life Insurance to Secure Alimony Payments
Most family lawyers agree that using life insurance to secure alimony payments to be a prudent and cost effective method to protect the recipient spouse, should the one paying alimony die before their alimony obligation is completed.
This article will take this concept and focus on two recommendations that can provide even greater protection to the spouse receiving alimony.
Life Insurance Ownership
Often we see PSAs (property settlement agreements) that stipulate a specific amount of life insurance that needs to be in place, usually on both spouses (especially when there are children); however, most times there is no mention of who will own the life insurance policy. The PSA normally dictates that the receiving spouse is entitled to an annual report proving the life insurance is still in force. While well intentioned, we believe this approach does not provide the full protection needed for the recipient spouse.
In our view, ideally it is the receiving spouse who should own the life insurance for the simple reason that whoever owns the insurance policy controls the policy.
Taking a specific example: if the receiving spouse doesn’t own the policy and doesn’t have ongoing access to policy status (including premiums paid and beneficiary designations), they are totally vulnerable to having the policy terminate (due to lack of payment) or having the beneficiary changed to someone other than themselves, without their knowledge.
Under either scenario, should the payer spouse pass away before their alimony obligation has been fulfilled, the receiving spouse may be forced to sue the estate of the ex spouse, something that could be very time consuming, expensive and if there are no assets in the estate, totally unfruitful.
Solution: The ideal solution is for the receiving spouse to be the owner of the policy; that way, they will always know the status of the policy. If premiums are not being paid, they can follow up with their ex spouse for payment or even make the payment themselves while they resolve the unpaid premium issue. The owner also can rest assured that the beneficiary cannot be changed without their written approval.
In the scenario where the payer spouse will not agree to having the recipient spouse own the policy, we recommend “assigning” the death benefit to the recipient spouse. This can take place in one of two ways. If the entire death benefit is needed to secure alimony payments, then an absolute assignment form is filed with the insurance company. This form, signed by both parties, basically prevents the payer spouse from changing the beneficiary without the recipient spouse’s written permission.
If only a portion of the death benefit is needed to secure the alimony obligation, then a collateral assignment form (again signed by both parties), is filed with the insurance company. Under this scenario, the recipient spouse must be paid their stated portion of the payer’s death benefit before any other named beneficiary is paid.
In addition, we recommend that in either assignment scenario, the payer spouse also sign a written agreement that allows the recipient spouse access to any requested policy information at any time.
By using the combination of death benefit assignment and access to policy information, the recipient spouse will be protected from any attempted beneficiary changes or policy lapses.
These recommendations are easy to implement, cost effective and provide tremendous protection to spouses receiving alimony.
Rochelle Forster and Craig A. Hyldahl, CDFA offer securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC, offer investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offer annuity and insurance products through AXA Network, LLC. AXA Advisors and its affiliates and associates do not provide tax, accounting or legal advice or services. You should consult with your own tax and legal advisors regarding your particular circumstances. Individuals may transact business and/or respond to inquiries only in state(s) in which they are properly registered and/or licensed. R.I.C.H. Planning Group, LLC is not owned or operated by AXA Advisors or AXA Network PPG-87808(03/13)(exp.09/15)
In New Jersey, a separation agreement is any legal document signed by both spouses outlining the terms of the separation. Subjects resolved in a separation agreement can include child support, child custody, debt allocation and asset distribution. Notarizing the document ensures its validity, since there is no such case-type in New Jersey that provides for a "legal separation." Spouses wanting child support during the separation period, however, must file a claim with the New Jersey probation department.
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