Divorce doesn’t eliminate the concerns you insured against as a married couple. In fact new needs are generated.
The child support-paying spouse may be the noncustodial parent, but he/she will still want to ensure the children’s basic needs are met and provide for major aims such as education expenses even if deceased. In addition, costs for childcare could rise significantly if the custodial parent dies. Consequently, it may be advisable for the noncustodial parent to purchase life insurance on the custodial parent.
Similarly, the support-receiving spouse has an interest in protecting payments against an untimely death of the payor spouse. As the beneficiary on the ex-spouse’s life insurance policy, the payee would receive insurance proceeds upon the payor’s death. However, the payee beneficiary lacks control of the policy if not also the owner. The payee would not know if the ex-spouse ceased paying premiums, took out a loan on the policy, or even changed the beneficiary. If structured as part of the divorce agreement, ownership of the payor’s policy can be transferred to the support-receiving spouse who is also the policy’s beneficiary and the transfer of ownership can avoid gift taxes. Premiums may qualify as alimony if paid by the payor spouse for life insurance on the payor’s life and if the supported spouse is the owner and beneficiary of the policy.
A less common approach is for the supported spouse to purchase a policy on the payor spouse. He/she would gain control as with the transferred ownership, however it may be expensive and there may be reluctance on the part of the payor spouse to undergo the underwriting requirements.
By Geoff Owen