As a result of a divorce or separation, many parents and former spouses must make support payments. A common question that arises for divorcing or separating spouses is, what happens if the payor parent dies prior to the time when there is still a support obligation? One way to ensure that the support obligations continue upon the death of the payor parent, is to secure those payments with life insurance policies.
Many families choose to secure their support obligations through life insurance. In some circumstances a life insurance policy already exists.
The issue of support obligations continuing after the death of the payor parent can be addressed in a separation agreement or court order (if the parties are involved in a court proceeding).
There are some important questions that should be addressed when considering this issue for example, what are the advantages and limitations of the following:
(a) Designating the ex-spouse /surviving parent as the beneficiary of the insurance policy?
(b) Designating the child or children as the beneficiary of the insurance policy?
(c) Placing the insurance policy proceeds into a Trust?
Other issues should also be considered, for example, what happens if a payor parent changes the insurance coverage while alive, or terminates the insurance coverage all together? What happens if the payor parent changes the beneficiary designations, or the payor parent enters into a new spousal relationship or remarries?
Designating the ex-spouse as the Beneficiary of the Insurance Policy
In many circumstances families believe that in the case of securing child and spousal support, the ex-spouse should be the beneficiary of the insurance policy. There are some potential downsides to this designation. The proceeds from the life insurance policy are not protected from the ex-spouse’s (the payor spouse’s) creditors. They can also be affected by bankruptcy, and may be subject to claims of his/her present spouse. In fact, in the recent case of Dagg v. Cameron Estate, 2016, the Ontario Divisional Court held that despite the deceased’s designation of his surviving ex-spouse as the irrevocable beneficiary of his life insurance policy in a consent court order, the proceeds of the insurance policy were available to his current wife and child to satisfy their claims for support under the Succession Law Reform Act. Leave to Appeal this case to the Ontario Court of Appeal has been granted, and it will be interesting to see how the Court of Appeal handles the irrevocable designation.
Designating the child as the Beneficiary of the Insurance Policy
Some families believe that naming the child as the beneficiary is a simple approach, and have their insurance policies made payable directly to their child or children. This approach may seem simple, but it actually creates a difficult and expensive problem. In Ontario a child is considered to have reached the age of majority at age 18. The policy proceeds will need to be paid to a court-appointed guardian (probably the surviving ex-spouse). The guardian has the legal obligation to administer the insurance funds on behalf of the child until age 18. At that time, whatever is left in the guardianship account must be given to the child outright.
Should the recipient ex-spouse or trust own the Policy?
One way to prevent a payor parent from changing the beneficiary designation of a life insurance policy is to have the “recipient” (the ex-spouse, ex-partner or trust for the benefit of children) own the policy. The payor parent would be the “insured,” but the owner of the policy would have the right to change (or not change) beneficiaries. The question of who pays for the policy premiums could be addressed in the separation agreement.
Reducing windfall gain
There may be a concern by the payor parent that there may be a windfall gain that may exist if a large life insurance policy is paid out to secure a very small remaining amount of support obligation. This situation could occur if the payor spouse dies a few years prior to the end of the support obligation. One way to eliminate the windfall is to have a decreasing schedule of required policy proceeds, depending on how old the child is or depending on the remaining dollar amount of the spousal support obligation. This may provide the payor parent some flexibility in naming other beneficiaries.
If you would like to explore the issue of using life insurance to secure child and/or spousal support, you should consult the experienced family lawyers at Radley Family Law. Our team can advise you on this and other issues, including court matters and drafting your separation agreement.