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).
Assuming that post-retirement husband’s alimony obligation is cut in half, and assuming that his life expectancy is 77 years old (average U.S. life expectancy) he would have an estimated post-retirement alimony obligation of $1000 for 8 years (from 69 to 77). His estimated post-retirement alimony obligation would be $96,000 calculated as follows: ($1000 per month for 12 months = $12,000 per year x 8 years = $96,000).
Combining husband’s estimated pre-retirement alimony obligation of $336,00, and his estimated post-retirement alimony obligation of $96,000 yields an estimated alimony obligation of $432,000. Husband’s life insurance to cover alimony should be approximately $432,000.
If husband has life insurance through his employment he can use that insurance coverage to meet the alimony coverage requirement. Alternatively, he can purchase either term or whole life insurance on the private market. Whatever the source of the insurance he is usually obligated to provide wife proof that the insurance is in place on an annual basis. To protect against the possibility that husband may allow his life insurance coverage to lapse prematurely the marital settlement agreement should include language which places a lien on husband’s estate if he fails to have adequate life insurance coverage in place at his death to protect wife’s alimony interest. Similarly, if husband cannot obtain affordable life insurance coverage due to his age, his medical history, or other disqualification, a trust may have to be set up to secure the wife’s future stream of alimony income.
It should be noted that the need to obtain life insurance to cover future alimony payments can be obviated if husband and wife negotiate a payment of lump-sum (one-time) alimony. In this situation, as there is only one upfront payment made, there is no alimony stream of income to protect, and therefore no need for life insurance.
If you have questions about alimony, life insurance, child support, division of assets, or any other family law-related queries, do not hesitate to call my office at 201-731-3086. Or you can e-mail me using the e-mail contact form. I have been representing divorce and family law clients in Bergen, Hudson, Passaic, Essex and Union counties for over 20 years. The consultation is free of charge.