Life Insurance and Divorce

Although divorce rates in Canada are on the decline — dropping by eight per cent from 2006 to 2011 — it’s estimated that 41% of marriages will end in divorce before the 30th year, according to The Globe and Mail

If you are a member of that 41% club and are required to pay child support, you will often also be required to buy life insurance, so you can still fulfill your obligation in the event of your death.

The Ontario Family Law Act says an order for support binds the estate of the person having the support obligation, unless the court provides otherwise. Plus, Section 34 (1) (i) of the Ontario Family Law Act states “that under section 33, (which deals with orders for support) the court may make an interim or final order requiring that a spouse, or same sex partner, who has an insurance policy, designate the other spouse, same sex partner, or their child as the beneficiary irrevocably.”

This means that not only are those ordered to pay child support required to have life insurance, but they may be legally ordered to make their former spouse or their own child together the beneficiary. So, with life insurance suddenly becoming a requirement for those going through divorce, here’s a few things one needs to consider when buying life insurance with a divorce in mind.

How Much Life Insurance Do You Need?

Obviously the exact amount will be part of the settlement negotiation, but, in general, the former spouse who is paying the child support will need to cover the amount they’re expected to pay until their child turns 18, or whenever the court decides the support expires. It would probably be best to obtain a term policy for the required amount that covers the period of time it takes for their children to become adults. Now, the person receiving support should probably cover the amount of the support they’re entitled to, so that they are covered in the event of the supporting spouse’s death, especially if they live in a province where the deceased’s estate is not required to pay the outstanding support. For example, If your former spouse is paying $15,000 per year in child support payments for about 15 years, then a good starting point would be $15,000 X 15 years = $225,000 of coverage. 

What Type of Life Insurance Should You Get?

Like it’s suggested above, you’d probably want to go with term insurance. This is because child support obligations are likely to end at some point and the term you choose should be based on how long that financial obligation is likely to last. You can chose from term 10, 15, or 20 and any number of terms in between, depending on the insurance company you’re buying from, but try to match the time frame of the financial obligation, so there’s no need for coverage at the end of the term, as renewal premiums would be significantly more expensive than premiums paid during the term.

Other Considerations

During a divorce, it’s particularly important to know who the policy owner will be, (in other words, who will be paying the premiums?) who will be the beneficiary of the policy, (if it’s child support that’s being covered, the beneficiaries should not be the children, but the recipient of the payments) and whether the policy is revocable or irrevocable. The owner of the policy is typically the one paying for it, but they can also cancel it or stop payment at any time. If the divorce is acrimonious, the beneficiary, most likely the former spouse, may want to consider becoming the owner as well as the beneficiary. This way, their former partner is prevented from potentially abusing them by holding the policy over their heads and making it a weapon in the divorce. Most policies are revocable by default, so the owner can change the beneficiary without notifying the current beneficiary. If you are the current beneficiary, consider making the beneficiary irrevocable, so your signature is required before the beneficiary can be changed.

Existing Insurance Policies are Assets

Life insurance policies, including the benefit and any investment values, could be considered assets your spouse may be partially or fully entitled to. It’s recommended that you consult a lawyer about what could be the fate of your policy. Also, if you have a permanent life insurance policy meant to be in place for life, your former spouse may be able to claim  a portion based on what you paid for while you were married and whether it was acquired during your relationship. Here is where you would consider changing the beneficiary provision to irrevocable.

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