Most people don’t want to insure their lives to the possible financial benefit of a former spouse.  However, often the law requires that parties create a financial backstop to their long-term obligations, whether alimony, child support, or even property held in one party’s name for a length of time before it will be distributed.

Most often, that financial backstop will be a life insurance policy, owned by the insured, with a death benefit naming a former spouse or children for a designated sum.  But that is not universally so.  Some people choose to retain or create an insurance policy for the benefit of a former spouse, post-divorce, that has nothing to do with alimony, child support, or property distribution.

Assume that while a couple is married they purchase a life insurance policy on husband’s life and they name the wife the owner and beneficiary of the policy. Assume further the parties later divorce and that neither party has an alimony obligation to the other. Is there anything wrong with this picture?

What is an Insurable Interest?

“Insurable interest” is an insurance law and public policy concept as to who “should” be allowed to benefit financially from someone else’s death.  If I take out a policy on your life, without being a relative and without any economic basis, then insurance law in many jurisdictions would prohibit my collecting upon your death, as I have no “insurable interest” in your passing.

In our example above, however, wife clearly had an insurable interest in the policy when it was taken out. The parties were married and owed one another an obligation of financial support, including support for children.

Question:  Does the later divorce, with no alimony provided, terminate wife’s insurable interest — so that she may no longer own and/or be the beneficiary of the policy?

What happens if you forget to remove a named beneficiary from whom you are divorced, and then you die?

If you want to take out a policy on your own life for the benefit of a former spouse — for any reason or no reason — or, post divorce, you decide to rename that person as a beneficiary of an existing insurance policy, then you may do so — just as you may designate them post-divorce as a beneficiary by Will, even if you don’t have to.  Such designations will “stick” after your death, because you clearly intended to benefit a former spouse – even if you didn’t have to.

Former spouses have the right to name each other as insurance beneficiaries, and to collect on policies, simply because there was a marriage.  And they may contractually confirm that decision in a Settlement Agreement, with or without economic  reasons.

However, New Jersey law protects people and their estates from failing to remove their former spouses as named beneficiaries on life insurance policies. Absent Settlement Agreement provisions requiring continued life insurance coverage, the law imputes to decedents an intent to “disinherit” a named beneficiary who also happens to be a former spouse, simply by the insured’s inaction until death.

What happens if a named beneficiary is later deemed “overinsured” relative to the financial obligation?

This is an important topic, because an Estate may challenge the beneficiary of Settlement Agreement-mandated life insurance for a stream of payments (alimony/child support), and seek an equitable reduction of death benefits, so the named beneficiary does not receive a windfall.

For example, if a divorcing obligor parent for a young child took out a Settlement Agreement- required life insurance policy in Year 1, naming the other parent as beneficiary and covering 22 years of prospective child support and college; the child is now age 23 and done with college; and the obligor died owing no child support and no college money; should former spouse be allowed to collect $500,000 on behalf of the child? The answer should be “no”, and the estate should receive $500,000, free and clear of the surviving former spouse’s claims.

What is the best solution to this life insurance uncertainty?

In our first example, above, you should note that the parties named the wife the owner and beneficiary of the policy.  That was a very good move for the wife, because she:

1. Has an insurable interest;
2. Cannot be removed from the policy, no matter what; and
3. If she survives husband’s death, is guaranteed to collect on the full amount of the insurance policy, regardless of divorce, alimony termination, or children’s emancipation, and paying no attention to an estate’s later claim of “overinsurance”.

As is true in many aspects of life, it is good to be an owner.  The one caveat is that wife must timely pay the premiums, since the policy is hers.  That detriment is more than outweighed by the multiple benefits of insurance policy ownership, and may be mitigated altogether by including the life insurance premium in the dependent  spouse’s budget for alimony (wife’s incremental tax payments represent pennies on the dollar in long term benefits to her).

The other spouse is not disadvantaged by these provisions at all.  This method cuts one of the economic cords between the parties, which can be a benefit.  It is a “no look back” method, which works well for many divorcing parties.

Conclusion

To maximize life insurance protection for a dependent spouse in a divorce, the following benchmarks should be included in the Settlement Agreement:

1. The dependent spouse shall purchase and own a life insurance policy on the other party’s life and in a stated amount;
2. The dependent spouse shall pay the life insurance premiums.
3. The other party shall cooperate fully in the process, including undergoing a physical exam, if required; and
4. The dependent spouse must outlive their former spouse.

If you or your loved ones should have a crisis or concern in a New Jersey family law matter, be sure to contact us today, whether by phone or in writing.  We are experienced family lawyers, “compassionate counsel and tough advocates”.  We will be happy to assist you.