Broker Check

Why Most Divorcees Are Confused About Alimony Insurance

April 26, 2022
Share |

"I AM RUNNING OUT OF MONEY!..." You've lost your alimony payments. You are panicking, feeling fear, or even hysteria. What to do? Well, do you have alimony insurance?

For 16 years, I have helped women ease their financial burden during and after a divorce. I often hear these horror stories. And it is most challenging when an ex-spouse dies or becomes disabled. 

Each of these stories is heartbreaking, especially if there are children. The common problem is a lack of essential planning.

Result? 

Economic hardship and colossal stress... Especially close to my heart is the story of my neighbor Sarah and how she lost her hair. It's all about the alimony insurance. 

Are you curious?

Alimony Insurance and Why My Neighbor Lost Her Hair

I met Sarah and her husband Mike five years ago. She was a pretty woman in her early 40s with gorgeous red hair. Life was beautiful for Sarah: beach-front house, two kids in private school, a successful career, and happy marriage. Or, so she thought.

One day, Sarah found out about Mike's infidelity. Going through emotional turmoil, she filed for a divorce. Fortunately, Sarah got a nice settlement.

Two years later, Sarah got terrible news: "You've got cancer."

Soon after, Mike got in an accident and passed away. It was no more spousal support. Luckily, alimony insurance was a part of the agreement.

Remember Sarah's beautiful red hair? It was her pride, and she was terrified to lose it because of chemo.

Sarah heard about the cold caps, a protocol to prevent hair loss. At that time, it was $600 a session out of pocket. She was confident that everything would be fine.

In a few days after scheduling chemo, she's got a call from the insurance company telling her that alimony insurance had lapsed.

Imagine!

Sadly, there are many women like Sarah. Some lost their home and moved to a smaller place or relocated. Others said goodbye to a private school for a child or, like Sarah, stopped special medical treatment. Particularly hard is the loss of alimony for older women.

As for Sarah, she couldn't pay for cold caps. Unfortunately, her hair didn't grow back. She is okay now since I helped her to start generating income.

What is your story? Do you want to secure your independence?

To start, let’s answer a question, "What the heck is alimony insurance?"

👉 TAKEAWAY:  If you don't plan in advance and your ex-spouse dies, you can lose your alimony payments.

What is Alimony Insurance?

If you are confused about insurance, you are not alone. No wonder it might sometimes trigger sour emotions. But before you judge, I encourage you to learn more, at least about the following basics.

  • You should know that when your spouse dies, the alimony payments stop. That's why you need a tool to replace your ex-spouse's income.
  • Alimony insurance is essentially, life or disability insurance. The insured here is an ex-spouse who pays spousal support.
  • Courts in many states can order life insurance to protect child support or alimony.

Why do courts do this?

Remember the goal of spousal support?

It is to assure a person's marital lifestyle after a divorce. Another point is to minimize the impact of a divorce on children. 

So, you should view alimony insurance as a security blanket for spousal support.

Is there an alternative to alimony insurance?

Yes. I will cover it in a later chapter.

The next logical question is, "What did happen to your existing life insurance?"

👉 TAKEAWAY: Alimony insurance is life or disability insurance to protect your alimony payments.

Continuing Needs for Life Insurance in Divorce

Yes, most married couples carry some kind of life insurance, but often it’s not enough. Why?

The same primary reason – lack of basic planning. Remember that it is an essential part of your overall financial freedom.

 

What should you know?

First, you get insurance through group coverage at work. Generally, it is $50,000 or so unless you are an executive. Also, it is only in effect while you are an employee.

Second, if it is private insurance and you got it a while ago - when did you last review it? Your family has grown, you bought a house, make more money… But you still have the same insurance coverage. Right?

Well, how many times in the last few years did you upgrade your phone?

You got my point.

Let’s assume the ideal scenario. As a primary breadwinner, your husband got life insurance a while ago. He listed you –a wife and later your children—as beneficiaries. It means that if your husband dies, you will receive the death benefits stated in the policy.

So, what’s the difference between life insurance in marriage vs. alimony insurance?

The reality is that when you are getting a divorce, your needs change. Remember, alimony insurance's goal is to replace alimony payments and child support. This obligation is only for a specified time.

How long?

It depends on state-specific rules. Of course, if parents choose to, they can continue with life insurance for much longer. But it’s only possible if there is still decent communication between spouses. But what if it is a bitter divorce or, God forbid, a blood bath?

Rest assured, your ex-spouse feels that you will benefit from his or her death. Why?

They are already upset about paying you alimony. And for many people, it’s too much to swallow…

👉 TAKEAWAY: Update your insurance when you have a life-changing event. Know your state-specific rules about alimony payments.

READY TO ACT?

Problems with Alimony Insurance

Next, you should know that getting alimony insurance can be tedious.

#1. Physical and medical records

Your ex-spouse should agree to take a physical. He/she meets a medical professional who takes a person's blood, urine, vitals, and sometimes ECG. All these depend on many personal factors:

  • Age
  • Health condition
  • Medical history
  • Amount of insurance

Also, your ex-spouse should ask their physician to release medical records to an insurance company.

#2. Cost

Next, is how much does alimony insurance cost? It is especially critical if you are getting a new policy at your current age. It is a major consideration since you probably will need it for many years. But what is the price to have peace of mind?

#3. Agreement between spouses

Both ex-spouses have to agree either to have the alimony policy or make modifications to an existing policy. Is your spouse a reasonable person? Well, if you both agree, the insurance amount should be a part of the annual budget. In turn, it will be a factor in how courts decide on alimony amounts.

#4. Pre-existing conditions

Of course, your ex can get coverage only if he or she has no major health problems. But what if not? First, you have to apply for insurance before the divorce is final. Otherwise, applying for coverage after a divorce can be too late. Second, if the ex-spouse is uninsured, there are other alternatives:

  1. The court can order a payor spouse to establish a trust fund instead of life insurance.
  2. The deceased spouse's estate might be subject to liability for the remaining amount of alimony. But be sure there is money there.
  3. You can have guaranteed payments through an immediate annuity. Here, an issue is having a lump sum of cash ahead of time. 

But wait! There is more... 

👉 TAKEAWAY: While divorcing, be aware of alimony insurance issues and be prepared. 

GRAB YOUR FREE CONSULTATION

Alimony Insurance: Biggest Mistake to Avoid

Even if your spouse is insured, you should know how to structure a policy to avoid major mistakes.

Remember Sarah? So, you might be curious why she lost alimony insurance?

Sarah was receiving her monthly alimony stated in a divorce decree. The court ordered her husband Mike to carry life insurance payable to Sarah. The term was to be as long as Sarah will be receiving alimony.

About a year later, Mike decided to stop his payments, so the life insurance lapsed. Of course, Sarah didn’t know about it until he died. Unfortunately, she got diagnosed with cancer.

The loss of alimony insurance had a devastating financial impact. Yes, Mike was in contempt of court. But it was too late to do anything. And even if Sarah sued his estate, there were not enough assets to make up for the life insurance. How to prevent this problem?

You, as a recipient spouse, should own the life insurance policy. This way, nobody can make any changes without your knowledge. So, she would have received notice that the policy would lapse. Another way to avoid Sarah’s problem is to make her an irrevocable beneficiary. In this case, if Mike stops paying, she will be notified before insurance lapses.

👉 TAKEAWAY: If you receive alimony payments, you should either be the owner of insurance or an irrevocable beneficiary.

Alimony Insurance FAQ

I am sure you still have some questions. Let’s address some of them.

❓Question: IS A LIFE INSURANCE A MARITAL ASSET?

✔Answer: It depends on the type of insurance - term or cash value. The cash value policy, in most cases, is viewed as a marital asset. It is critical for a financial affidavit. Term insurance, on the other hand, is separate property. But if the insured is uninsurable, it could be a marital asset in some states.

❓Question: CAN I CHANGE MY LIFE INSURANCE BENEFICIARY DURING A DIVORCE?

✔Answer: Beneficiary designation is how property can pass from person to person. An example is life insurance or retirement accounts. In life insurance, a divorcing spouse can change a beneficiary at any time. But most spouses don’t have it as a priority. In most cases, you update beneficiary designation after a divorce, but it depends on state statutes. Some states, for example, can revoke a divorced spouse as a beneficiary. Result? You will not be able to collect.

❓Question: CAN AN EX-WIFE CLAIM INHERITANCE AFTER DEATH?

✔Answer: Overall, it is “no,” according to state laws. But! The divorce decree can override those rules. So, pay attention to specific language in your agreement.

❓Question: HOW ALIMONY INSURANCE IS TAXED?

✔Answer: It depends!

The taxation of alimony changed after the Tax Cuts and Jobs Act of 2017 (TCJA). In divorces dated January 1, 2019, or later, it’s NOT tax-deductible by the person paying the alimony. And if you are receiving support, you do NOT report those payments as income.

In pre-2019 divorces, premium payments are spousal support for tax purposes and CAN be deductible. Ex-spouses receiving alimony should declare them as taxable income.

If you start collecting insurance, it is tax-free income no matter the date of divorce.

👉 TAKEAWAY: Know what type of insurance you have if it is a marital asset, and what is a beneficiary designation.

In Summary: Alimony Insurance for Financially Responsible Divorce

I hope by now, you are no longer confused about the topic of alimony insurance and divorce. Again, it's about securing spousal or child support with life insurance, and it is a critical part of your financially responsible divorce. 

So what is the lesson from these women's stories?

LACK OF PLANNING! They all wish they had adequate alimony insurance.

Also critical are the beneficiary and the owner of the life insurance. If you are designated as an owner of a policy, try to negotiate extra child or spousal support to cover the premiums. This way, you will control policies and be sure that support is paid.

Another option is naming you as a beneficiary and a requirement that your ex-spouse gives you proof that the policy is in force.

Remember this even if it refers to life insurance required for child support or alimony by the court. 

Our goal here at Fleet Wealth is to help you get a financially responsible divorce. As a result, you will feel confident, calm, and in control.

So, are you ready to learn more about alimony insurance and how to protect yourself?

👉 Let's have a 15-minutes virtual coffee.

 

Be financially fearless!

Barry Giske