Disability Insurance and Divorce Planning

Disability insurance and divorce planning can help continue alimony and/or child support even when the payer becomes totally disabled.

By Matthew M. Bloch, Field Underwriter

It is often said that an individual’s greatest asset is their ability to work and earn an income. When the breadwinner of the family dies during their working years, the family’s financial support can die with them. Life insurance for the breadwinner provides the family with income replacement, protecting them from possible financial ruin because of the death of the breadwinner.

But what if the breadwinner becomes permanently and totally disabled? Statistics indicate that the probability of a disability is two to three times greater than the risk of death. The disabled individual not only loses their ability to produce an income, but will continue to incur costs for their care and maintenance. The ordinary cost of care includes housing, clothing, nutrition, and the usual medical expenses. Unfortunately, there will probably be extraordinary medical expenses that may not be covered by medical insurance, such as long term-rehabilitation, renovating the home to accommodate the disability, and caregiver expenses.

In the case of divorce, the ex-spouse responsible for alimony and/or child support should include protection in the event of a disability in their overall financial plan. It is not likely a disabled ex-spouse could continue to pay support and also provide support for themselves – and possibly a second family. This is especially critical if the recipient of the support relies upon those funds to support themselves and their children.

Protecting Alimony and Child Support through Disability Insurance and Divorce Planning:

Insurance exists where monthly benefits are paid directly to the alimony recipient, and this amount of disability insurance can be issued in addition to any other coverage the disabled ex-spouse may have.  In future years, this amount should be adjusted to reflect any obligation changes. Monthly benefits can be received tax-free under certain circumstances.

Income protection serves all the parties involved.  For the recipient, it eliminates the concern that the ex-spouse would become disabled and unable to meet their obligations of payments.  For the ex-spouse responsible for the payments of alimony and/or child support, it means that they will not have to go back to court to argue for reduced payments because of the disability or be forced to liquidate personal or business assets.

Case Study #1

A single parent stopped receiving monthly alimony and child support payments once the ex-spouse became totally disabled.  Following a 90-day waiting period, the insurance began paying a benefit of $5,000 per month directly to the single parent to match the pre-disability support payments. At the end of five years, the single parent received a lump-sum payment of $300,000 to fulfill the remainder of the outstanding benefit payments. Since the single parent paid the insurance premiums with “after-tax” dollars, the benefits were received tax-free.

Case Study #2

A business owner knew he would be forced to liquidate his personal and business assets in case of a disability; instead of facing that possibility, he purchased income protection for alimony and child support in case he were to become totally disabled. His alimony payments are $10,000 per month, child support is $3,000 per month, and private school tuition is an additional $3,500 per month. He is also responsible for college education expenses. Since his ex-spouse paid the premiums, if he were to become disabled, she would receive benefits on a taxable basis.

Family lawyers insure their earned income with disability insurance. For the same reason, they should recommend income protection for alimony and child support for their clients.

Matt joined the Bloch Agency in 1999 and is currently Vice President and Director of Operations. He is instrumental in the development and marketing of the Family ValueGuard Product line. He is a member of NAIFA and lives in Charlotte, NC. www.familyvalueguard.com

Related Articles

Life Insurance and Divorce

7 common pitfalls to avoid when negotiating life insurance for your client.

Taxable Spousal Support – Special Situations

Educate yourself regarding these unique situations when drafting a separation agreement.