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Health Insurance
In the traditional marriage, with the husband as the main wage earner, one concern is maintaining health insurance for the ex-wife after divorce.
The Consolidated Omnibus Budget Reconciliation Act (COBRA), passed in 1986, allows women to continue to get health insurance from their ex-husband's employer -- if the company has at least 20 employees -- for three years after the divorce. The normal COBRA provision states that, if an employee is fired or leaves a job, he or she can get health insurance from the former employer's insurance company for 18 months. In a divorce, however, that is extended to 36 months.
If an ex-wife decides to continue health insurance under COBRA, she must pay the premium as agreed. If she misses a premium payment, the health insurance company can drop her and is not required to reinstate her. So, she must pay that premium on time. Typically, she will not get the discounted group rate but will be charged the full individual rate.
I tell my clients, "I would advise that you shop for health insurance because if you can match the rate from your husband's company or get a lower premium with another company, you should buy your own. Then if something happens, as long as you pay your premiums, you are covered. Otherwise, at the end of three years, COBRA drops you, and then you have to start shopping for your own insurance. By that time, you might be uninsurable and not able to find insurance."
Most states have insurance for those who are uninsurable and cannot get health insurance any other way. As you would expect, this insurance is very costly. It is better to look ahead and get individual health insurance for a lower premium while you are still healthy than to gamble that you will still be healthy three years later.
Life Insurance
Because alimony payments stop upon the death of the payer, we recommend that life insurance be carried on the life of the payer to replace alimony in the event of the payer's death.
Always recommend that the wife own the life insurance policy and make the premium payments. This prevents any changes in the policy without her knowledge.
In one actual case, the court had ordered the husband, Jerry, to carry life insurance on his life payable to his ex-wife for as long as he was paying alimony. After three years, Jerry got tired of paying the insurance premiums in addition to the alimony, so he stopped paying premiums and the insurance was canceled. Nobody knew about it until a full year later, when Jerry was in a car accident and died of complications from his injuries. Alimony came to an abrupt halt and there was no life insurance! Yes, Jerry was in contempt of court for failing to maintain the insurance, but it didn't make any difference at that point.
Also recommend that, if the wife can afford it, she should buy life insurance that can build cash value. Then the cash account within the policy is hers to do with as she wishes. She may even use it for retirement. She can borrow from it at any time, or surrender the policy after the maintenance period ends and use the cash. Another option would be to purchase level term insurance for the life of maintenance if permanent life is unaffordable.
A third recommendation is to make sure that if new insurance is needed, it be applied for before the divorce is final. Then, if the husband cannot pass the physical and cannot get new insurance, there is still time to modify the final settlement to make up for this possibility.
If the court orders the husband to purchase insurance to cover maintenance and/or child support and the wife owns the policy, the premium payments are treated like alimony for tax purposes and he can deduct them from his taxable income. Likewise, the wife will need to declare them as taxable income, unless the parties agree in their separation agreement to exempt the payment from the alimony tax treatment.
Disability Income Insurance
A second way to protect the stream of alimony income is to have disability income insurance on the payer's ability to earn income. Assume, for example, that Jerry pays his ex-wife $1,200 per month based on his salary of $6,000 per month. Then he becomes disabled. With disability income insurance, he might then be able to receive $4,000 per month tax-free and could continue making maintenance payments. If he had no insurance and no income, he probably would go back to court and ask to have alimony reduced.
Annuity
A third way to protect alimony is to have the payer buy an annuity that pays a certain amount per month equal to the alimony payment. This method can work well with high net worth couples. Assume that the husband, Jerry, buys an annuity that will pay an amount to his ex-wife, Sara, equal to the alimony payment. The interest portion of each payment is taxable to Jerry as income, but deductible by him as alimony. Sara will pay taxes on the payments. The annuity will generate a monthly check that will always be on time. Neither Jerry nor Sara need to worry about it, and the principal can still belong to Jerry. Once the alimony obligation has been met, the payments will revert to Jerry.
Problems with Canceling a Policy
Sometimes in anger at a spouse during the divorce process, a wife or husband will cancel insurance policies. One example would be if the wife keeps the couple's sport-utility vehicle, which has been insured by the husband. He figures she will buy her own insurance from now on, so he removes her from his policy. If she has an accident before getting her own insurance, she is not covered.
Another example is when a husband bought a large life insurance policy on himself 10 years previously, for the benefit of his wife. Now that they are getting divorced, he cancels the policy. He doesn't want her to get any money in case he dies before the divorce is over. Then the court directs him to own life insurance to cover alimony. To get a new policy now that he is 10 years older may cost him twice as much per month as the old policy.
Divorce is an inevitable part of working with married couples as their trusted insurance adviser. It's important to know the basics on handling insurance for the sake of both parties in the divorce. By handling these coverages appropriately, you can maintain a client relationship with both parties and help yourself as you help them.
Carol Ann Wilson, CFP, FDP, is a pioneer in the field of divorce financial planning. She has operated her pre-divorce financial consulting company since 1986. Ms. Wilson also has served as an expert witness in court in more than 120 divorce cases nationwide. She is the author of The Financial Guide to Divorce Settlement and 40 Tips For Surviving Your Divorce.
