It is critical for a recently divorced client to remain protected against potentially catastrophic life, health, property and casualty risk exposures. This logic is sup- ported by a study which reported that “illness or medical bills contributed to
62.1% of all bankruptcies in 2007.”4 The problem is exacerbated by the possibil- ity that insurance coverage in place prior to the divorce may no longer be valid after the divorce. For example, if the health insurance coverage was a part of the former spouse’s employer benefit package, the new situation would now create a potentially dangerous gap in the client’s insurance coverage which must be immediately closed. We will now present key special insurance-related issues pertaining to the divorced client.
Life Insurance
A convenient starting point is to assess the coverage by the current life insur- ance policies. This can be performed by asking these questions: (a) What life insurance is currently in effect? (b) Who is the owner, and who is the designated beneficiary? (c) Are beneficiary designations revocable or irrevocable? (d) What is the amount of the death benefit and is it adequate for the new situation?
Answers to these and other related questions can help the planner evaluate the current situation.
One application of life insurance for the divorced client relates to insuring the receipt of alimony and child support payments. An alimony or child support award creates an insurable interest, since a financial loss would occur if the payor spouse died before fulfilling these payment obligations. Based in this insurable interest, the recipient spouse can purchase a life insurance policy on the payor spouse’s life, agree to make the premium payments, and name as the beneficiary herself (or himself) or the child. Such a strategy certainly would not be needed if the court decree required the obligated spouse to purchase a life insurance policy and designate the former spouse or child as the irrevocable beneficiary of that policy. But then the planner should be certain that the payor spouse is not authorized to take out loans against the cash value. That would reduce the death benefits of the client. A possible alternative strategy might exist if the court ordered the payor spouse to place assets in trust or to purchase an annuity to collateralize the obligation. Life insurance plays a huge role in pru- dent planning for the divorced client, since the insurance benefits provide financial support for the child and liquidity for the estate. Still, to ensure that the life proceeds are directed to the right person, the planner must ensure that the
4 David Himmelstein, Deborah Thorne, Elizabeth Warren and Steffie Woolhandler, 2009, August.
“Medical Bankruptcy in the United States, 2007: Results of a National Study,” American Journal of Medicine. Retrieved from http://www.pnhp.org/new_bankruptcy_study/Bankruptcy-2009.pdf
beneficiary designations are in order. Why? Many times the benefits uninten- tionally went to the ex-spouse, because the beneficiary designation was never changed following the divorce.
Disability Insurance
While income replacement upon death is important to dependent survivors, income continuation during periods of illness, injury, or disability is critical for ongoing family living expenses. In working with the divorced client, the planner should assess the gaps created by the divorce and develop recommendations to fill that gap. This is critical. A single wage-earner has no cushion to protect the family against cash flow problems.
It is true that the divorced client cannot buy a disability insurance policy on the former spouse to ensure continued alimony and child support payments in case of disability. However, that does not prevent the client from requesting the payor spouse to take out a disability policy and offering to share in the premium payments. If the client’s offer is taken, a letter of understanding should be drawn specifying that, in case of disability, the payments would be used for ongoing alimony and child support payments.
Health Insurance
Another planning priority relates to the assessment of the health insurance cov- erage both for the divorced client and the custodial children. If the client’s health care coverage was provided by the former spouse’s employer, then the planner could recommend continuing that coverage under the COBRA or the Affordable Care Act (Obamacare) for civilian families or TriCare for military families. COBRA allows divorced spouses to remain on the former employer’s health care plan for up to 36 months, after which it can be converted to an individual policy. Here the divorced spouse must pay the monthly insurance premium plus administra- tion costs (up to 2 percent of premium cost) to the former employer.
The spouse is then granted the same benefits and coverage as before. The cus- todial children who were part of that plan would also be covered. Obamacare provides the nonemployee client with general options if COBRA is not selected.
However, there are similar time constraints in opting for Obamacare. One must sign up following the date of divorce, known as the “special enrollment period.”
TriCare has a similar 36-month continuation arrangement for un-remarried former spouses and the children formerly on the plan. So rather than contacting the employer, the client should be advised to contact Humana Military Healthcare Services.
Long-term Care Insurance
Generally speaking, long-term care insurance becomes a priority consideration for individuals in their 50s and 60s. For the divorced client, this coverage is more important because after divorce there is no spousal caregiver in the immediate picture. Of course, the planner needs to assess the overall situation (e.g., adult children capable of offering care, ability to fund ongoing premiums, etc.) before making recommendations.
Other Insurance
In completing the analysis of risk management for the divorced client, the plan- ner needs to review the current automobile, homeowner’s, and umbrella liabil- ity policies. This ensures that the planner adequately address the client’s new life’s circumstances.
Managing insurance premium costs might be a major issue when creating a sus- tainable postdivorce budget. As explained in Chapters 4 and 5, the planner can select from many strategies, including: increasing deductibles, extending elimi- nation periods, or reducing daily benefits. Consistent with risk management strategy, the focus should always remain on covering first the potential cata- strophic exposures.