Life insurance often becomes an important issue in a New Jersey divorce when one spouse has an obligation to pay alimony or child support.
Why?
Because if the person paying support dies before that obligation ends, the person receiving the support, or the children who depend upon it, may suddenly lose income they were counting on.
Life insurance can provide security for those obligations.
Why Is Life Insurance Required in an NJ Divorce?
New Jersey law allows courts to require reasonable security for alimony and child support obligations, which can include life insurance.
The basic concept is fairly straightforward. If you're required to pay support for a period of time, there may need to be a way to protect the people who depend upon that support if you die before the obligation ends.
That doesn't necessarily mean every person paying support needs the same amount of life insurance. The appropriate amount depends upon the facts of the particular case.
Life Insurance to Secure Alimony
Let's say a spouse is required to pay $4,000 per month in alimony.
That's $48,000 per year.
If the obligation is expected to continue for another ten years, simply multiplying $48,000 by ten gives you $480,000.
But that doesn't automatically mean the supporting spouse needs a $480,000 life insurance policy for the entire ten years.
Why?
Because the remaining alimony obligation decreases over time. If the supporting spouse dies nine years into a ten-year obligation, for example, there is far less unpaid alimony remaining than there was during the first year.
The appropriate amount of insurance may therefore depend upon the remaining support obligation, the financial circumstances of both spouses, existing insurance coverage, the cost and availability of coverage, and other factors.
The goal is generally to provide reasonable security for the obligation, not to create an unnecessary financial windfall.
What About Life Insurance for Child Support?
The same basic concept applies to child support.
Suppose a parent is paying $400 per week in child support. That's approximately $20,800 per year. If that parent dies while the child is still dependent upon that support, there needs to be consideration given to how the child's financial needs will be met.
The analysis may also involve other anticipated obligations, including a parent's potential contribution toward college expenses.
But again, there isn't necessarily one simple formula that applies to every family. The child's age, the amount of support, anticipated duration of the obligation, available assets, existing insurance, and the family's particular circumstances can all matter.
How Much Life Insurance Is Enough?
This is often where the disagreement begins.
The person receiving support wants enough insurance to make sure that he or she, or the children, will be financially protected if the supporting spouse dies.
The person paying support generally doesn't want to pay premiums for significantly more coverage than is reasonably necessary to secure the remaining obligation.
Both positions make sense.
That's why the amount of required life insurance should be considered in the context of the actual support obligations and the financial circumstances of the family.
In some divorce agreements, the required amount of coverage may even decrease over time as the underlying support obligation gets smaller.
What If There Is No Support Obligation?
What happens if both spouses are retired, their children are grown and emancipated, and there is no continuing alimony or child support obligation?
That's a very different situation.
If there is no underlying support obligation to secure, the traditional reason for requiring life insurance may no longer exist.
But divorce cases are fact-sensitive. There may be circumstances involving existing policies, agreements between the spouses, estate-planning considerations, or other financial arrangements that still make life insurance relevant.
That's why you shouldn't assume that simply being retired, or having grown children, automatically answers the life insurance question.
Life Insurance Is Part of the Financial Picture
Life insurance isn't usually the first thing people think about when preparing for divorce. They're thinking about the house, retirement accounts, alimony, child support, custody, and how they're going to afford two households.
But if support will continue after the divorce, life insurance can be an important part of the overall financial settlement.
You need to determine who should maintain the policy, how much coverage is appropriate, who should be the beneficiary, how long the coverage should remain in effect, and what happens as the underlying obligation decreases or ends.
Those details should be addressed carefully rather than treated as an afterthought.
If you're considering divorce and want to better understand the financial decisions you may face, my free Divorce Smarter Course explains important issues you should understand before and during a New Jersey divorce.
Until next time,
Steve