Similar to the requirement that life insurance be purchased by a parent who will be paying child support, a spouse who will be paying alimony to their ex-spouse must also obtain life insurance to cover their alimony payments in the event of the paying spouse’s death. The amount of life insurance to be purchased is calculated by multiplying the amount of alimony to be paid by the term, in years, of the alimony payment.
For example, if after a settlement or trial the husband is ordered to pay his ex-wife term alimony of $2000 per month for 7 years, he will pay her a total of $168,000 in alimony over the 7 year period ($2000/month x 12 months = $24,000/year x 7 years = $168,000 total alimony payments). To cover his alimony obligation he will have to obtain life insurance in the amount of $168,000, naming his ex-wife as the beneficiary on the policy in the event of his death. As he pays the alimony and the total balance owed decreases he can reduce the amount of life insurance that is required to cover the alimony obligation. However, what happens if husband is required to pay permanent alimony?
In the situation where husband is required to pay permanent alimony the term of the life insurance obligation is usually split into two parts: pre-retirement alimony and post-retirement alimony. An example will help to explain the concept. Let’s say that husband is 55 years old and the divorce settlement calls for him to pay permanent alimony of $2000 per month to his ex-wife. A reasonable retirement age for husband would be between 67 and 70 years old. The parties can agree to peg pre-retirement life insurance coverage to cover payments of $2000 per month until husband’s retirement at 69 (1/2 way between 67 and 70). If husband is 55 years old his pre-retirement alimony obligation would be for 14 years. His estimated alimony obligation pre-retirement would be $336,000 calculated as follows: ($2000 per month x 12 months = $24,000 per year x 14 years = $336,000). Continue reading →