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Insurance and your Separation / Divorce Agreement

August 2017

Insurance is a key consideration in your separation agreement. Suppose you have your separation agreement finalized. Your ex-spouse will pay you child and/or spousal support payments for a period of time in the future. Perhaps there is also a balance of the equalization payment from dividing your assets yet to be made in the future. What happens if your former spouse dies before these payments are made? What happens if he or she is disabled and unable to work, and therefore unable to pay you? What happens if you are covered by his or her health insurance, and the coverage ceases? This article will touch on these three topics, but see your own professional advisors for more specifics and before making any final decisions.

Life Insurance
If you want security that you will receive your future payments in the event of death, life insurance on his or her life is one way to guarantee payment. The need for a guarantee of payment should be considered by your lawyer and financial divorce advisor. If insurance is used, it should actually be in place before the agreement is finalized. That way, you will not need to worry about your ex-spouse not following through with the purchase, or being medically declined for coverage. If your ex-spouse is to be insured but is found to be uninsurable, a different settlement may need to be negotiated to make up for this lack of life insurance coverage.

How should this life insurance be set up? If an existing policy is used, or if the paying spouse buys a new policy and is the owner, then the spouse receiving support should be an “irrevocable” beneficiary. Irrevocable” means that the policy beneficiary, i.e., the person receiving support, cannot be changed without that beneficiary’s permission. Unless the designation is irrevocable, the policy owner can change the beneficiary at any time. (As a side note, upon separation, it is typically prudent for a person to review their insurance, RRSP, TFSA and other beneficiary designations to update them. If not updated, and a person enters a new relationship and then dies, their life insurance/RRSP/etc. would go to their previous spouse.)

If the paying spouse is the owner, and the recipient spouse is named as the “irrevocable beneficiary”, there is still the possibility that the beneficiary designation could be changed. This can easily happen with employer group insurance plans – if the employer changes the carrier of plan, a new beneficiary designation would be made with the new plan. Therefore, unless reasonable certainty can be obtained that the irrevocable beneficiary cannot be changed, the policy should be owned by the recipient spouse. This means that the spouse receiving the payments will need to pay the insurance premium. Consequently, the paying spouse may need to pay additional support so that the recipient has enough cash to pay the premium. Not only would the support need to be increased by the amount of the premium, but also by the amount of income taxes that will need to be paid on the increased support. Furthermore, the agreement would need to take into account future changes in the cost of insurance premiums as the insured person ages and/or the policy is renewed. Ownership by the recipient spouse would also ensure that the paying spouse does not cease making premium payments, resulting in cancellation of the policy.

If the payer has a large amount of capital on hand, instead of life insurance, another way to guarantee future support payments would be to have the payer buy an annuity that pays a monthly income equal to those future payments. The payer would purchase an annuity in his or her name, which would pay interest-only payments to the recipient. If the payments are for deductible spousal support payments, with proper legal wording, the interest would be taxable to the payer, but deductible as a support payment, which in turn would be taxable to the recipient as spousal support. The term of the annuity would match the support obligation.

Pledging assets as security may be another way to guarantee payments, particularly appropriate for settling a debt from equalizing family assets. However, assets are normally not easily sold to provide cash flow, and often are not of sufficient value to guarantee the full future obligations.

I have discussed life insurance here in relation to protecting support payments coming from an ex-spouse. This in no way reduces the importance of having life insurance on your own life, especially if you are supporting children. Child support received from a former spouse is only part of the money needed to raise your children. Ensure you review your insurance needs with an insurance professional.

Disability and Critical Illness Insurance
While life insurance will protect future payments in the event of death of the payer, what if the payer is unable to continue working because of disability? If the payer is receiving income from employment or self-employment, perhaps you should be negotiating to have a disability insurance policy in place. If the paying spouse becomes disabled and has no other income, that spouse would likely return to court to have the support order varied, resulting in a reduction of support payments. A disability policy would provide him or her with continuing income, enabling them to continue paying.

Use of a critical illness policy could also be considered, which would pay out a lump sum in the event of a serious illness being diagnosed.

Health Insurance
If you are covered by your spouse’s group health insurance plan through his or her employment, this is yet another topic to discuss with your lawyer and financial divorce advisor. Will you continue to have health insurance coverage for you and your children? If your spouse is the parent of your children, continued coverage of the children should be no problem. In addition, certain employer group insurance plans allow an ex-spouse to continue to be covered under the employee’s policy, as long as a new relationship does not commence. Some policies allow continued coverage even if there is a new marriage or common law relationship, if required by a court order. In such cases, the new spouse would not be covered. Of course, coverage could still cease upon employment termination, retirement, death or if the group insurance policy is cancelled by the employer. There are a couple important elements that need to be considered:

1. Ensure that your ex-spouse does not remove you from his or her policy before the separation agreement is finalized. If you are removed, and you later agree that your coverage should continue, the employer’s policy may not allow you to be added back as a beneficiary because you no longer qualify as a spouse (or because of medical reasons).
2. Before negotiating on this issue, obtain an understanding from the plan administrator what options are available because many of these plans differ in some respects. It is no sense negotiating to remain on the plan and find out later that it not allowed.
3. Even if you to remain on the plan, circumstances may arise that prevent you from continuing to do so, such as remarriage of your ex-spouse or cancellation of the policy by the employer. You may wish to consider purchasing your own insurance policy and build the costs into your support negotiations. Remember that the cost will increase as you age. Another option is to remain on your ex-spouse’s plan, but purchase a special policy in case you need to purchase it on your own in the future. Medavie Blue Cross offers an “Assured Access” policy. As they state on their website, “Once you qualify medically for this plan, you don’t have to qualify again if you lose your group health benefits.” Your health is assessed at the time you apply for Assured Access, and, of course, you may not qualify even then based on your existing health. If your health is currently okay, “To qualify you must be 64 or under and you must be enrolled in a group health benefits plan for the past 12 consecutive months.” Depending on your age, premiums range from $20 to $27 per month (August 2017) for an individual without dependants. This is another cost to consider in your budget and in your negotiations.

Insurance is an important factor to consider because it protects you from major financial costs. It can also be expensive, making settlement negotiations difficult. However, understanding the pros and cons of having insurance protection is key. Make sure your legal and financial counsellors deal with this important issue, and that you plan and budget accordingly after reaching a final conclusion.

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Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Risk Management – A Review of Insurance Issues and Related Matters

January 2005

The purpose of risk management is to protect you against unforeseen losses that you cannot afford. You need to review all areas where such risks exist and take appropriate steps to minimize them. An important part of this risk management process is to use appropriate insurance, but there are other procedures to employ also. This article will provide you with some general comments in this important area.

Life Insurance – “Needs and Wishes”

Life insurance is used primarily to supply the money that will be required to provide for life’s necessities to the individual’s dependants as well as to provide cash for the protection of other valuable assets in the event of death. The amount and type of insurance depends on the value and/or composition of estate assets in conjunction with the individual’s desires with regards to providing for his/her family.

For example, if one member of the family is a breadwinner (only one main income earner), and his or her spouse and children cannot live without that source of income, there is a need for insurance. If the breadwinner dies, how will the family meet their basic living needs, or carry on a lifestyle to which they are accustomed? Often, the remaining spouse will return to work, but then there may be childcare expenses and re-training costs to meet. The parent may also wish to establish an education fund for the children and/or pay off the family’s loans. In such circumstances, there is a real need for life insurance.

In other circumstances, there will be enough continuing income to meet all required costs, either from investments, the spouse’s employment, or other sources, or there may be no dependants. In such cases, a person may wish to leave a larger inheritance to a beneficiary, such as a family member or a charity. In such cases, life insurance can be purchased to increase the value of the estate. An individual may wish to bequeath the full value of their estate to his or her beneficiary before income taxes are paid. A typical example is where a person has a large investment portfolio, or an RRSP, which will be subject to taxes on death. If life insurance is purchased equivalent to the amount of taxes to be paid, more money will be available for estate distributions. These latter situations are examples of a wish for insurance. It is not essential, except to meet the wishes of the person.

It is important to compare the costs and features of various insurance products to ensure you are getting a good price, and the coverage that you need or want. Life insurance falls into three basic categories: term, whole and universal. Term insurance (except Term to 100 policies) are normally aimed at short-term coverage. For example, families with young children who will be self-sufficient after they finish their education. Whole and universal life policies are two forms of long-term or permanent insurance that may be appropriate for permanent needs, such as payment of income taxes on death, or to provide support for a disabled child. Ensure you understand the nature of each type before selecting one of these products. Your insurance broker can provide you with this information, or we can advise you on the different characteristics of these products.

Disability, Critical Illness and Long-term Care Insurance

A major disability whether from illness or accident, often forces retirement in advance of expected retirement age, creating problems in planning for financial security. Not only is present income significantly affected, but also the ability for providing future income, including survivor income for dependants, is very limited. A life threatening illness even in retirement can create significant financial burdens. There is often an increased need for ongoing income to meet costs of medical care, to buy medical equipment and /or make necessary modifications to a residence or automobile. Illness may also require full-time nursing care, either at home or in a nursing care facility. There are insurance products now available to deal with all of these uncertainties. You may wish to review your options with your broker.

With respect to disability insurance, if you considered a private plan instead of or in addition to a group plan, personalized options would be available, such as “own occupation” coverage, and proportional payments so that you would never be disqualified if you obtained lower paying work in an alternate occupation. Increased coverage may also be available. Other key riders of disability policies include:

Medical insurability rider (guaranteed eligibility for increased coverage);
Cost of living rider to adjust benefits with inflation;
Guaranteed renewable to avoid disqualification for various reasons;
Zero day qualifying period, removing the requirement for a period of complete disability before qualifying for benefits.

Home and Auto Insurance

It is our opinion that automobiles should be insured with a minimum liability coverage of $2,000,000 in addition to collision and medical benefits. Many advisors recommend up to $5,000,000, and you should look at the extra safety versus the cost of this higher limit. Your house should be insured adequately for fire and theft, with replacement value insurance, and should also covered by at least $2,000,000 of liability coverage. Liability claims are increasing in recent years. Also consider an endorsement to cover water and flood damage.

For insurance claim purposes, you should list or videotape your possessions so that you have a permanent record in the event of a claim. This list or videotape should be retained in a safety deposit box or other secure location away from your premises to avoid loss.

If you wish extra protection for your personal belongings, especially if you have frequent absences from home, you should consider physical protection with burglar and smoke alarms, as well as light timers. Such protection would cost in the range of $1,000 – $2,000 to install, plus annual costs of about $200 for monitoring, if considered necessary.

Reductions in house insurance premiums are available for installation of smoke alarms, fire extinguishers, burglar alarms and similar safety devices. Also, major repairs or improvements to home will sometimes result in a premium reduction. You should ensure that you advise your agent accordingly to take advantage of discounts.

Group Insurance

We have two comments with respect to group insurance coverage through your employment. First, group insurance coverage will likely discontinue upon your retirement and you should investigate whether private coverage is appropriate, at least until you are covered under the government senior citizens plan. Medavie Blue Cross sells an insurance plan called Assured Access that you may wish to consider, especially if there is a risk of job loss or if you are a separated spouse still covered by your former spouse’s group insurance. If you meet the qualifications, this insurance guarantees you the right to acquire your own personal health insurance coverage in the future (based on your health today) if you should lose your existing coverage. Second, as discussed above, disability insurance is typically not as comprehensive in a group plan as in a private plan. You should also be aware that disability pensions are fully taxable if your employer pays any part of the premium on your behalf. (Employer payments towards life insurance are taxable benefits when the premiums are paid, but life insurance proceeds themselves are tax-free).

Travel Insurance

If you are planning a trip, especially outside of Canada, travel health insurance is a necessity. The cost of a medical emergency in the U.S.A., for example, can cost you tens of thousands of dollars for a few days in the hospital. This will NOT be reimbursed by your provincial health care plan (other than a very small portion). Trip cancellation and interruption insurance can also protect you against substantial costs, should you need to cancel your trip before departing, or should you need to return home early. Travel insurance policies are not created equally, and you need to read them carefully to see what is and is not covered. Warning – an incorrect answer on the application could invalidate your coverage, so read the questions carefully. In addition, if you leave home with a pre-existing health condition, you may also have coverage issues, and such conditions should be discussed with the insurer before leaving. Your doctor is neither an insurance specialist nor a lawyer, so do not take his or her advice on whether your coverage will still be intact. See this Travel Insurance checklist from First Rate Insurance Inc. for some cautions.

Other Insurance and Creditor Proofing Issues

There are many areas where we all face risks during life. In many cases, insurance products are appropriate; in other cases, there are steps you can take for protection. A few other areas we wish to review follow.

Personal umbrella liability insurance is a product that you may wish to review with your insurance broker. Basically, it is additional liability coverage that fills in after your other policy coverage is fully utilized. For example, if you are in an automobile accident and are required to pay a claim that exceeds your automobile liability coverage, your umbrella policy would cover you for the additional amount up to your limit for umbrella coverage. Similarly, it simultaneously covers you for any shortage in liability claims that would otherwise be covered by your home insurance.

If you act as a director for any corporation or non-profit organization, you should realize that you may be held liable for certain financial liabilities of the organization under certain circumstances.

You should also be aware of the risks of joint ownership if you hold any of your assets in this form. If the other owner encounters financial difficulties, a creditor may seize the asset and jeopardize your part ownership.

You may wish to note that provincial legislation in PEI protects Islanders’ RRSP investments from creditors in the event of financial difficulty. In addition, certain investments held with a life insurance company are also protected under certain circumstances, even if not with an RRSP. Discuss the requirements with your insurance broker.

At some time in the future, you or a family member may require full-time care in a nursing home. Government subsidization is dependent on an individual’s income and assets. If you wish to discuss possible ways to protect your estate value, please contact us.

Business Matters

If you consider becoming self-employed, either alone or in conjunction with someone else, you should meet with a professional accountant to discuss a myriad of important issues. A partial list of topics to discuss with respect to risk factors include:

Incorporation
Director’s liability
Buy-sell agreements and insurance coverage
Title of personal assets between spouses
Personal guarantees

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