Disability Insurance and Divorce Settlements
In the world of disability insurance, most financial advisors focus on protecting their clients in the event of an accident or illness that prevents them from working. Their client is the primary beneficiary. However, there may be others who were counting on that income to keep a roof over their head, food on the table and to pay the tuition for their education. The client’s spouse and their children are beneficiaries, as well.
In a perfect world this all sounds great, unfortunately, the statistics continue to show that 50 percent of marriages end in divorce. What happens when part of a family loses a source of income and also the guarantee of that source of income due to divorce? There is an opportunity for financial advisors to play an important role in protecting a spouse and the children of the marriage with a guaranteed source of income used for living and educational expenses.
Read on to learn about this overlooked marketing opportunity, as well as some meaningful strategies to protect all the beneficiaries involved, especially those without a voice.
In networking through attorneys, you may discover a niche in working with referrals from divorce attorneys. Most, if not all, settlements include division of assets and liabilities owned by the parties. Additionally, when appropriate and especially if there are children involved, there is an alimony agreement. What happens to the ongoing alimony payment if the payor becomes sick or hurt and is unable to earn the income to make the support payment?
Consider this scenario: Sandy is referred to you by her divorce attorney. As she tells you her life story and that of her kids, Hanna, age 5, and Jessica, age 3, you can hear the fear in her tone of voice. The marriage between her and her husband, Tom, started out with great promise and slowly deteriorated. The birth of their children was the highlight of their seven-year marriage. Now, there is no turning back. Their common values changed and Tom has found someone else. Divorce is eminent as they move through the process and details of the settlement. As a father, Tom cares deeply for Hanna and Jessica and has been a hands-on dad to his pride and joys. He is a dentist and has brought home the majority of the household income. Sandy does editing on a part-time basis.
The divorce settlement includes alimony and child support. In divorce proceedings and negotiations, if alimony and/or child support are components of the possible settlement agreement, life insurance for the benefit of the dependent spouse and children is usually made part of the paying spouse’s continued obligation. However, there are no requirements regarding disability insurance in divorce settlements. The payer spouse is under no obligation to obtain and maintain a disability insurance policy for the benefit of the dependant spouse or children. However, many family law attorneys are open-minded to the inclusion of disability insurance as part of an overall divorce settlement. That said, attorneys representing payer spouses generally do not allow a disability insurance provision to be included in the divorce settlement agreement.
SO WHAT DO YOU DO OR SAY AS A FINANCIAL ADVISOR IN THIS CASE?
A number of strategies can be used to successfully navigate this situation. Most important to remember: the goal is to have a requirement for a disability insurance policy on the payer spouse written into the divorce settlement for the benefit of the dependent spouse, as well as for the children who have little to no say in the process.
• Negotiate a disability benefit for the full amount of the alimony and child support to be paid for by the payer spouse with the dependent spouse as beneficiary.
• Negotiate a disability benefit for the full amount of child support to be paid for by the payer spouse. Most times the payor spouse will be the beneficiary. Although a payer spouse may be reluctant to pay additional insurance premiums for the benefit of his ex-spouse, there is a strong possibility that the payer spouse would look more favorably on providing protection and stability to the children and himself.
• Negotiate a disability benefit for the full amount of alimony and child support to be paid for by the dependent spouse with the dependent spouse as beneficiary.
In Sandy and Tom’s case, a meeting was arranged with them to discuss the merits of having Tom own a disability policy for his, Sandy’s, Hanna’s and Jessica’s benefit. It came down to the fact that Tom cared enough to do the right thing and protect the financial security of his kids.
The consequences of not having a disability insurance policy in place on the payer spouse could cause severe economic hardship to both spouses and their children. Generally, when an individual becomes disabled because of a non work-related injury or a medical condition such as a heart attack, stroke or cancer to name a few, the payer spouse’s recourse is to seek Social Security disability benefits. These benefits only provide for a small fraction of the payer spouse’s prior employment income. The reduced funds available to the payer and dependent spouse are further burdened by the likelihood of increased medical bills.
Make disability insurance a topic of discussion during the active divorce settlement talks so that the divorcing couple fully understands the possible future scenarios that can adversely affect them and their children.
With the long-term view toward protection and stability, divorcing couples and their respective attorneys should seriously consider the possibility that the payer spouse may become disabled during the alimony and child support obligation periods. The failure of attorneys to look long range for their client’s real needs may be a detriment to their clients.
Disability insurance is affordable and can be obtained in different coverage amounts, such as the amount equal to the cost of the monthly child support payment or just the cost of the monthly alimony obligation.
So, think beyond personal disability insurance and help your divorcing clients understand their needs to secure their financial foundations as well as those of their dependents. Your expertise is needed at this emotional time in the lives of all parties involved to help them look beyond immediate needs and safeguard the future for their family in spite of its changing circumstances.