Suzanne Durbin, an advisor at GC Financial Advisors in Marietta, Ga., gave a woman going through a divorce just the reassurance she needed. It wasn't enough for her soon-to-be former husband, a doctor, to pay child support for their four-year-old twins, who would continue to live with her. She needed him to buy term life insurance to guarantee that the money will keep coming, no matter what happens to him.
Question: Don't divorce courts require insurance on the child-support payer? Answer: When couples with children divorce, life insurance is part of the settlement 80 percent of the time, according to David Vanderzee of Vanderzee Financial, a financial advisory firm in Clifton Park, N.Y. For advisors, that means plenty of opportunities for them to work alongside lawyers in dealing with the crucial issue of financial support.
“It is often the rep who brings up the idea for life insurance — not the attorneys,” says Linda Lepe, senior wealth-management advisor with CUNA Mutual Group, Madison, Wis.
Durbin met her future client at a divorce seminar. The woman was at a loss to answer her attorney's question about what she was looking for in terms of support guarantees. Durbin's answer was a $2 million policy that the doctor, who earned $500,000 annually, agreed to take out on his life. With the source of the income stream secured, the client could focus on thornier issues, like how she and the doctor would split up their assets, which consisted largely of real estate and the doctor's practice, where the woman worked as a $30,000-a-year administrator.
However that works out when the divorce is final, some of the illiquid assets are likely to be turned into cash. The woman would then get her share. Durbin might very likely become the ex-wife's investment advisor.
Still, the devil is in the details. Advisors need to be at the top of their game when working on insurance coverage in divorce proceedings, because people often behave badly when the talk turns to money. The advisor's role is likely to include making sure the spouse being insured gets a physical, recommending the terms of the policy, advising on who should own the policy and knowing what to do if the divorce — despite everyone's best efforts — spins out of control.
Timing Is Critical
The first step for any advisor is to get the spouse being insured to the doctor while the divorce talks are still in progress. A physical exam is required before an insurer will actually grant a life insurance policy. Jerry Cohen of Financial Solutions for Divorce in Pasadena, Calif., points out that not everyone is insurable, or not insurable at a reasonable cost. So a physical exam is a crucial first step.
If the client can't be insured, an advisor can suggest an alternative, like a single-premium annuity that can pay out a fixed sum of money regularly over a set period of time. However, you won't get a chance to suggest this later. Cohen says, “Once the case is settled, it may not be ‘reopenable’ if [the spouse] is uninsurable.”
The Right Policy
After you establish that the client is insurable, the next step is deciding how big a policy should be. There are basically two factors that need to be taken into account: How much support money is needed annually, and for how long. For example, Durbin's client estimated she would need $100,000 annually to support the twins until they were adults. Since policies are bought in five-year blocks, that means a 20-year term policy for $2 million.
Advisors may need to “shop around” to get the best rate for their clients. “Wholesalers and insurance specialists are a wealth of information,” says Lepe.
The Other Shoe
Advisors who negotiate the most generous policy may be doing it all for nothing if they forget one key detail, says Maryann May, a registered rep with Keystone Financial Strategies in Littleton, Colo. “It's not just enough to be the beneficiary of the policy, but the owner as well,” says May.
Take the case of May's client who was only a beneficiary. Her ex-husband remarried and made his new wife the new beneficiary. Since he owned the policy, the client never knew what happened — until he died and her support payments simply stopped. The new wife got the life insurance. Had the client been the owner this wouldn't have happened since only the owner can change the beneficiary.
Of course, being the owner and beneficiary means getting the bill, too, so it's necessary to make sure the former spouse who is paying the premium gets his or her own copy. “This helps ensure that the payments don't suddenly stop,” says Lepe.
The commissions on this type of insurance sale are not huge. In cases like the Durbin example, the total commission is only $300 to $1,000, but the relationship that has been built is worth much more. Durbin has already gotten referrals from the doctor's wife and stands to gain millions of dollars in assets under management from her when the divorce is completed.