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Insurance and your Separation / Divorce Agreement

1650Insurance 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.

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