This article has been updated to reflect corrections made by the authors. Go to the corrected section.
As clients lives get more complex, their divorces do, too. This is particularly the case when spouses are connected by assets like insurance.
Here’s how family lawyers can approach life and health insurance upon a separation or divorce.
When people separate, former often spouses remain connected well beyond the physical separation — usually through a co-parenting relationship or because of ongoing child or spousal support obligation.
It is customary when negotiating the financial terms of a divorce to ask the person with an ongoing financial obligation to secure that obligation.
The most frequent type of security is life insurance. Whether the support payor has life insurance privately or through a group plan at work, it’s fairly simple to determine the death benefit required. It is based on the amount and duration of the support obligation, and it does not have to be the entire amount of the policy.
The most common type of beneficiary designation is when the non-insured spouse is the direct irrevocable beneficiary. A more complicated method is where the beneficiary is constituted “in trust for the children.” This would require the parties to work with a lawyer to create the trust agreement. In more acrimonious cases, the insured may select a family member, rather than the former spouse, to be the direct beneficiary or beneficiary in trust for the children. This adds complication, because the beneficiary should be someone who can help the non-insured spouse access the insurance proceeds after the insured’s death.
If the person who will have an ongoing financial obligation does not have life insurance, but could obtain it, and if there are sufficient financial means, they will likely be asked to apply.
But if the person is uninsurable, there are alternatives. One might be to accelerate the support obligation through a lump sum payment of either the full or a partial amount, so that even if the payor dies during the support period, the payee still has sufficient funds. If the payor doesn’t have enough cash to pay a lump sum, another option is making the payee the beneficiary of a registered savings plan. This is an imperfect solution, however, because there is no way to make the designation irrevocable or to prevent the spouse from depleting the plan.
In a recent case, Dagg v. Cameron Estate, the court found that an irrevocable designation may not prevent a subsequent spouse of the deceased from making a dependant’s support relief claim against the life insurance policy. Family lawyers are struggling to find more secure alternatives. New language around the confirmation of the charge on the estate if the insurance is not fully available is likely to emerge.
Separation agreements may allow a variation of the security if circumstances change. Examples include when someone’s life insurance policy is no longer available through employment, if premiums rise significantly, if the person originally entitled to receive support is no longer receiving it, or if the duration of the support obligation is ending.
If the prescribed security is not in place at the time of death, separation agreements usually allow for the balance of the support obligation, or for the designated amount of life insurance, to become a first charge against the estate of the deceased.
Coverage for the children and former spouse*
The spouse who has health insurance is usually asked to keep the former spouse under the plan for as long as the plan allows, or until the spousal support obligation ends.
Many plans allow a former spouse to remain insured under the insured’s health policy until a divorce is finalized. Other plans terminate coverage for a former spouse immediately upon a separation. Some high-end executive-type insurance policies may be more flexible, but still need to have the carrier’s underwriter approve any continuation of benefits.
Former spouses may have to apply for their own individual health insurance if their employer does not provide a group benefits plan. Discuss this with the former spouse well in advance of the coverage ending; generally, a non-insured spouse’s right to apply for coverage expires after 60 days of being removed from the insured spouse’s plan in order for them to have their pre-existing conditions covered under their new plan.
If the non-insured spouse has pre-existing medical conditions, some policies don’t require medical information, but the premiums tend to be high and the coverage limited. If the former spouse is healthy, they may get better benefits by applying for individual coverage that does require medical information. This type of plan provides more coverage and options.
In the case of the children, it is generally not a problem to maintain them under the plan until age 25, provided they are full-time students. If both spouses have health insurance, coordination of benefits can be done according to the parent whose birthday is first in the year (e.g., if Peter was born in August and Susan born in Jan, Susan’s plan would pay first and Peter’s plan, second).
Insurance refund cheques
A common problem exists with the reimbursement of the health expenses paid by the non-insured spouse and claimed through the insured’s health plan. Often, the insurance company will send the insurance refund cheque directly to the insured’s bank account regardless of which spouse actually paid the expense.
Some, but not all, insurance policies permit the insurance refund cheque to be sent directly to the non-insured spouse.
In non-acrimonious cases, a joint credit card can be used to pay for the children’s health expenses, and the insurance refund cheques can be deposited in a joint bank account.
In acrimonious cases, separation agreements should contain clauses to compel the insured to provide the insurance refund cheque to the non-insured spouse who paid for the expenses within a certain period, along with the statements sent by the insurance company to verify the amounts.
As you can see, these areas are complicated. Advisors should work closely with family law lawyers to best serve divorcing clients.
*This entire section has been corrected by the authors. It previously stated that former spouses would be kept under the plans as beneficiaries, rather than as the insured. Timelines and coverage details have also been corrected. Return to the corrected section.
Melanie Rousseau is a Family and Business Advisor & Principal at The Assured Boutique Inc., specializing in creating asset protection and income strategies for life. She can be reached at melanie@TheAssuredBoutique.com.