7 common pitfalls to avoid when negotiating life insurance for your client.
By Steven Vaphiades, Life Insurance Professional
Financial disentanglement in divorce cases can be both high-stakes and high-effort for attorneys representing either spouse involved in the matter – especially considering the impact even the smoothest of divorces may have on a client’s financial well-being.
With the focus on investments, retirement plans, executive compensation, and real estate when negotiating a Settlement Agreement (SA), an attorney can underestimate the importance of finding mutually favorable terms for mandated life insurance. However, failure to procure the right kind and amount of insurance can have disastrous consequences for your clients – whether they are the insured ex-spouse or the beneficiary. Here are seven mistakes to avoid when negotiating life insurance requirements.
Relying on a Workplace Insurance Policy
It may be a nice perk from your client’s employer, but relying on workplace insurance to satisfy the requirements of a SA is very risky. Even if the workplace policy provides the coverage specified in the SA, this type of insurance can be ephemeral: leaving an employer may cause the policy to lapse, potentially putting the insured ex-spouse in breach of their obligation and leaving beneficiaries without coverage.
Going to Extremes
Choosing the biggest company or the cheapest rates could come with a hidden price. Large providers may have longer underwriting times, which can be a problem when your client is facing a deadline for coverage. Before selecting any insurance provider, consider the company’s longevity, reputation, and financial strength ratings to ensure their promise to pay is backed up by adequate customer service and a track record of paying claims quickly and efficiently.
Using a Monolithic Approach
Coverage requirements usually decline as dependent children are emancipated. A “laddering” strategy – which employs a series of smaller, overlapping term policies – could save your client a substantial amount of money over time. Some insurers also offer term policies that include features designed to reduce the coverage amount over time.
Choosing the Wrong Product
In some situations, such as permanent alimony, whole life insurance may be the right product. But in many cases, term life or a blend of term and whole life policies presents a more cost-effective solution. One important consideration when determining the right product is whether your client intends to keep his or her coverage in place beyond the terms of the SA for a new spouse, adult children, or grandchildren.
Being Kept in the Dark
Insurance policies can lapse – without notice to the beneficiary – if the policy owner misses or stops making premium payments. Attorneys representing the ex-spouse beneficiary should consider establishing life insurance coverage on the opposite spouse so that the beneficiary is also the policy owner; this approach provides the beneficiary greater control, access to information, and security. Due to recent changes in state probate codes, attorneys should also consider affirmatively identifying any spousal beneficiaries on existing life insurance that will survive the divorce. Finally, be careful to specifically identify the subject policy in the SA (e.g., Policy Number, Face Amount, etc.).
Focusing Only on Income
Replacing earned income represents a good baseline for SA insurance negotiations. But you should also consider future financial obligations that clients may face when considering insurance coverage amount – including college expenses and uninsured healthcare costs such as orthodontia.
Going It Alone
As an attorney, you know the value of enlisting the help of qualified experts. So if life insurance will be a factor in a case, reach out to financial professionals who have specific experience with divorce. They might have a suggestion that could make you a hero to your clients.
Steven Vaphiades, LUTCF, has worked in the life insurance industry for over 24 years. He currently leads SBLI’s Life Insurance Solutions Center; SBLI was founded in 1907 by future Supreme Court Justice Louis Brandeis. www.sbli.com
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