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The situation

Nadia Boghossian*, 40, is tired of fighting with her husband. They’ve been trying to make their relationship work for the sake of their children, who are eight and 12. After a particularly painful argument, she and Joseph finally agree their 20-year marriage is over.

Joseph moved out last month, commencing the separation period. The children, Xavier (8) and Yolanda (12), continue to live with Nadia at their house in Burnaby, B.C. They’ll see Joseph about 30% of the time. Nadia will have sole custody for support purposes.

Joseph makes $125,000 per year as a hospital administrator and Nadia makes $80,000 per year as a plumber. Based on an online calculator, Nadia thinks Joseph’s child support obligation will be $2,000 per month; he will owe no spousal support.

Nadia’s lawyer advises her that Joseph should take out a life insurance policy to cover his child support obligation, naming her as beneficiary. That way, if he dies before his support payments are completed, her children will be taken care of.

Joseph, 44, who smoked before the children were born, had a heart attack three years ago. With a family history of heart problems, he also has high blood pressure and cholesterol, and the stress of the divorce isn’t helping. He is concerned he won’t qualify for life insurance. Further, he doesn’t want to name Nadia the beneficiary of anything — he doesn’t trust her.

Joseph’s employer does not offer life insurance in his benefits package, though it does offer healthcare perks. Prior to the separation, Nadia and the kids were covered under Joseph’s benefits, as Nadia’s position does not come with benefits. Joseph’s plan will continue to cover the Boghossian children, but Nadia, who suffers from hyperthyroidism, is out of luck: she was kicked off the plan as soon as the separation commenced.

Nadia had been meaning to get life insurance after Joseph’s heart attack, but was so busy she put it off. With a divorce on the horizon, she knows she should apply for the sake of her children.

How should Nadia and Joseph proceed with regards to insurance?

* These are hypothetical clients. Any resemblance to real persons is coincidental.

The experts

Cathy Preston
Cathy Preston,
Vice-president, individual markets at RBC Insurance in Mississauga, Ont.

Melanie Twietmeyer
Melanie Twietmeyer,
Wealth advisor at Investment Planning Counsel in Calgary

Leena Yousefi
Leena Yousefi,
Founder, lawyer at YLaw Group in Vancouver

(Answers have been edited for clarity.)

Life and health insurance

Cathy Preston: An insurance advisor would review Joseph’s total need for life insurance — not just his need to cover child support (see “Insurance to cover support,” right). Other needs may include protecting any debts or liabilities, his children’s post-secondary education or funeral costs. The advisor will take into account any savings and assets, which can be liquidated at the time of death to offset the total amount of insurance that’s recommended.

Having a heart attack does not necessarily mean Joseph is ineligible for life insurance. He will, however, likely need to provide additional details about his follow-up care, symptoms and medications after the heart attack. Depending on these details, he may be approved for life insurance.

Joseph should also consider disability insurance, which insures his income if he’s unable to work due to an illness or injury. Based on his current income, he’d qualify for a $6,125 monthly benefit. The coverage would have a 90-day elimination period (benefits start after the 90th day of disability), with benefits paid for five years. The monthly cost for Joseph would be roughly $200.

If Joseph is ineligible for disability insurance, he should consider disability insurance that provides coverage for injury. This product guarantees his acceptance for injury-only coverage. Joseph would qualify for $6,000 in monthly coverage, with a 90-day elimination period and five-year benefit period. The premium would be roughly $25.

Nadia should also have her own life insurance policy, since she has dependants. But without knowing her exact debts, liabilities, expenses and assets, I can’t recommend how much life insurance she’d need. However, having controlled hyperthyroidism alone will not impact her insurability, especially if she’s in good health otherwise. She would need to provide additional information, such as medical history.

For health benefits, a good question Nadia should ask is: How would I pay my bills if I were unable to work due to an injury or an illness? The lifestyle that Nadia and her children enjoy, planning for the children’s education, and planning for her retirement savings all depend on her ability to earn a living.

Based on Nadia’s current income, she would qualify for a $4,400 non-taxable monthly benefit amount for disability insurance. Our research shows that, for working Canadians of a similar age to Nadia, the probability of incurring a 90-day-or-longer disability is about 45%. Based on this information — disability coverage with a 90-day elimination period and benefits paid for five years — the monthly cost for Nadia would be around $150.

Nadia may also consider critical illness (CI) coverage. For an additional $55.89 per month, Nadia could obtain $50,000 of CI coverage. This provides a lump-sum benefit even if she makes a full recovery, and she can use the money any way she chooses.

Alternatives to cover child support

Leena Yousefi: It’s not that common in B.C. for people to take life insurance to pay for support obligations. What [Nadia] is really looking for is not life insurance — it’s security. There are easier ways to make sure the children receive support.

If the couple owns the house, the default is that Joseph is going to keep half of the asset after divorce. Also, if he has an RRSP or TFSA, he could designate his children as the beneficiaries of each of these assets in case of death. Once he dies, the sale proceeds of the house, RRSP and TFSA will go into a trust account, and the children can get paid from that trust account by a trustee. Instead of naming Nadia as trustee, he can nominate a friend or family member, and he can allocate a second trustee in case the first trustee is unable to meet the obligations to administer the support amounts.

Prior to the children reaching the age of majority, Joseph could designate that the trustee takes about $2,000 out of his assets or savings to pay child support. That way, he will avoid some estate and probate costs because he’s already established a trust for his children.

Another common way to ensure children receive support is to bind the estate. Once he and Nadia enter into a separation agreement, Joseph will pay $1,845 per month, after taxes, in child support. Nadia can ask Joseph to add another clause to the separation agreement: if he dies, his estate is bound to pay the child support amount. Basically, you’re bringing his estate as an obligated party into the agreement between him and his wife. So, in case he dies, his wife won’t be left without options.

Joseph could owe spousal support

LY: Because Joseph is already paying child support, for the time being he doesn’t pay spousal support. But once the 12-year-old turns 19, Joseph may not have to pay child support for that child. This means about $900 per month opens up. At that point, Nadia can make a claim for spousal support, to which she’ll be entitled if her income is still lower than his.

To calculate how much she’ll get, both their incomes matter. Let’s say her income is still $80,000, and his is $125,000. I’m going to assume one of the children has turned 19, and we know they were together for 20 years.

There are three ranges of spousal support: low, mid and high. Low range is usually for marriages under five years without children. Mid-range is for marriages 10 to 20 years with children. High range is for traditional, longer marriages where one spouse stayed at home and didn’t work. In this situation, the mid-range would likely apply.

With one child under 19, he may have to pay between $34 and $558 per month in spousal support. When he no longer has to pay any child support, the amount of spousal support would be between $1,300 to $1,500 per month.

Getting through divorce

LY: The first thing they need to do is attend mediation and negotiate a division of the assets, debts, and child and spousal support. And they’ll have to wait one year from separation before they can apply for divorce.

They can settle assets during the separation period. It’s encouraged they settle as soon as they can, while there’s still some sorrow or empathy. The longer they wait after separation, the harder it will likely get because anger starts creeping in.

Melanie Twietmeyer: They’ll want to consider what financial security will look like: how health may impact future goals; who to rely upon in case of emergency; estate planning to protect final wishes; their monthly living expenses; how to pay down debt; and how to save for retirement, children’s expenses and emergency funding.

The first step is to complete a monthly expense statement. A thorough expense statement will provide a clear picture of expenses versus cash flow, and resources on hand.

Once a financial separation agreement is in place, the next step is to make an appointment with a wills and estate lawyer to review and formalize final intentions. In B.C., a divorce does not invalidate previous wills. Ensure the executor, guardians and trustees are carefully chosen. In addition, their wills should include an enduring power of attorney, which is a legal document to authorize an agent to manage financial and legal affairs if they’re unable to do so due to injury or sickness. The other document necessary for long-term estate planning in B.C. is a representation agreement. These agreements are drafted to ensure comprehensive healthcare and personal care matters are met in the event of incapacity.

LY: Overall, the most important thing is that they exhaust all opportunities to settle. If they don’t, they’re going to likely spend part or all of their life savings litigating. So go to separation counselling with a family therapist, which is counselling catered to helping them smoothly go through the separation route and learn how to co-parent and live separate lives. It’s not counselling to get them back together. These people are looking for options, and to do that they need to work together.

Insurance to cover support

If Joseph decides to get life insurance to pay for his child support obligations, he’d need more than $200,000 in insurance for the next 11 years—until the youngest child reaches the age of majority at 19.

Here’s how that breaks down.

Monthly payments
$2,000/month
x12months
=$24,000/year
Amount per child
$24,000/year
÷2children
=$12,000/child

/year

Xavier (8)
19majority age
8years old
=11years until age 19
11years
x$12,000/year
=$132,000total
Yolanda
19majority age
12years old
=7years until age 19
7years
x$12,000/year
=$84,000total
Total insurance needed
$132,000(Xavier)
+$84,000(Yolanda)
=$216,000

Joseph may apply for a Term 11 for $200,000 (covering only child support). If approved at standard non-smoker rates, the premium is around $30 per month* or $330 annually. The premium is guaranteed to remain the same for the 11 years needed.

* These rates are for a simplified term product Source: Cathy Preston