There’s a reason Joan Rivers has joked that “The second wife gets the biggest diamond.” Financial headaches often come with a divorce and/or a second marriage. The second wife, for example, may need to deal with the hubby sending money to his first wife and kids. There may be a court order for a divorcing spouse to buy life insurance to protect an “ex” and kids in the event of the death of the alimony provider. Plus, estate plans can be messy with second marriages. Litigation over marriage break-ups often lasts for years.
Data on life insurance held by divorcees or spouses in second marriages is scant. LIMRA, Windsor, Conn. keeps no statistics on the ownership of life insurance by single divorcees or those in second marriages.
Nevertheless, a couple of major surveys indicate that those involved in a divorce or second marriage may need life insurance. Sixty-five percent of those engaged to be married for the second time said they wanted life insurance, based on a 2008 survey of nearly 10,000 baby boomers by Experian Research Services, New York.
But an earlier 2007 survey by Simmons National, a Deerfield Beach, Fla. research firm, indicated that half of those who were divorced, separated or widowed were unconcerned about life insurance.
Meanwhile, data from the U.S. Census Bureau reveal that those who get divorced and/or those who remarry for a second time are approaching peak earnings years. Yet, they are young enough to qualify for low-cost insurance policies. The average age for persons getting divorced for the first time is 33, while the average age for those divorcing a second time is 39.
“You can avoid emotional and legal conflicts with ex-spouses and biological children by using life insurance,” suggests David Goldman, a Jacksonville, Fla., estate planning attorney.
Douglas Richmond, director of private wealth services for Lincoln Financial Advisors, Raleigh, NC, says that divorce settlements typically require the spouse who pays alimony, child support, children’s medical care, higher education costs and possibly mortgage payments, to carry insurance for as long as those payments are required. If the spouse required to make those payments already has a life insurance policy, benefits can be reassigned to the ex-spouse with children.
Through life insurance, if the spouse making those payments dies, income agreed upon in the divorce settlement may continue. Say the insurance is designed to cover child support. The policy can be set up to terminate when the children reach the age of adulthood, typically 18 or 21. If insurance is required for alimony, it can last as long as those payments must be made.
“Term insurance is (typically) used if the need is under ten years, because it is lower-cost,” Richmond says. “If (the need) is more than 20 years, permanent insurance can be used.” But Richmond adds that people often opt for 30-year term insurance.
Divorce settlements typically require the spouse who buys the life insurance policy to notify the other ex-spouse—typically the one with the children—that the coverage is in force and premiums are paid. Typically, there also are restrictions on changing policy beneficiaries.
Richmond often recommends universal life insurance, which permits flexible premiums, for longer-term commitments that are part of a divorce settlement. This way, as the cash value built up in the policy covers the cost of the insurance, the policyholder can reduce premium payments.
How the insurance is structured depends upon a client’s situation. The life insurance policy-owning spouse may need to make adjustments if circumstances change. Suppose an ex-spouse who is named as beneficiary on the insurance policy as part of the divorce settlement has remarried? The new couple may have two incomes to raise the children without a need for extra financial support. In that case, the policy owner may change the beneficiary on the policy.
But this is where it can get sticky. What happens if the policy-owning spouse changes the policy beneficiaries and stops paying premiums when the ex-spouse still needs income protection?
Some attorneys suggest that a divorce agreement should not let the ex-spouse change beneficiaries on the policy or stop premium payments.
Another option: An ex-spouse with the children can be named as the owner of the policy. The insurance policy’s premium payments can be factored into support payments.
Or, a provision might be included in the divorce settlement stating what happens if the policy is allowed to lapse after a specific period or if the beneficiary designation is changed. In that case, the ex-spouse with the children, based on the value of the insurance policy’s death benefit, may be entitled to part of the other spouse’s estate.
Richmond recommends that affluent persons place the insurance policies in trusts to reduce estate tax damage when they die. Couples in second marriages can use life insurance to solve some difficult financial and estate problems. For example, a life insurance benefit can be used to provide an inheritance to biological children while the second spouse and children from that marriage inherit other assets.
Attorney Goldman also stresses that “as the second marriage becomes more popular, it’s more important than ever to protect your insurance for your children.” Otherwise the children or others could be left out of any inheritance.
Take a case involving Goldman’s new client in a second marriage. Because she had the power of attorney for her sick husband, she was able to successfully change the life insurance beneficiary, originally his biological children, to her name. Five months later, he died. His biological children got nothing.
A revocable trust, according to Goldman, might have avoided this situation.
State laws vary, but with a revocable trust, the person with a power of attorney typically cannot change the beneficiary designations on the life insurance policy. The trust can designate who the policy owner would like to receive the proceeds and how it will be distributed. This way, insurance proceeds can be given both to the second spouse and the children from a first marriage.