By Trey Reynolds
With nearly half of all marriages ending in divorce, it’s not uncommon to have clients who are either going through divorce proceedings, living as a single parent after a divorce, or have been married more than once – with or without stepchildren.
Divorce is emotionally draining, and on top of that, the challenges divorce brings to estate planning can be an added stress. In many cases, one often overlooked tactic can provide tangible solutions for divorcees and blended families: life insurance.
By using life insurance to address some of these issues head-on, you can help your clients develop an estate plan that truly fits their needs, goals and unique family circumstances.
Here are five ways life insurance can help your clients in the event of a divorce:
- Provide funds for divorce-related expenses. If the divorce is contested or includes child custody issues, the proceedings can stretch from months to years, with attorney’s fees reaching into the tens of thousands of dollars. Clients with an established permanent life insurance policy can take withdrawals or loans from the policy’s cash value to help pay needed expenses. If the policy is designed effectively, your clients won’t have to liquidate other assets. or pull money from an estate that would have gone to beneficiaries.
- Protect the client’s income post-divorce. A client’s income can change dramatically as the result of a divorce, especially if one spouse was a stay-at-home parent. They may receive alimony payments to help make up the difference. But if the payor passes away unexpectedly, the lost income can cause a considerable amount of stress and financial hardship for those left behind. Permanent life insurance on the life of the paying spouse can help provide coverage and replace income lost if they die.
- Preserve the client’s estate post-divorce. Life insurance can also provide funds to pay off any existing debt held by the deceased spouse, which can eliminate the need to liquidate other assets from the estate that would have gone to the surviving spouse or other heirs. By taking withdrawals or loans from the policy – tax-free, if the policy is set up correctly – your clients can effectively plan their legacy, even if their ex-spouse hasn’t been entirely financially responsible.
- Ensure that children receive a fair inheritance. If your clients have children from a previous marriage, it may make sense to provide for them through life insurance, instead of passing their assets to a new spouse first. Or your client may choose to provide for the new spouse through life insurance and leave the estate to the kids outright or in a trust. Either way, splitting up the way in which your clients leave assets to biological children and a new spouse in a blended family can relieve a lot of stress and bad feelings. This is especially true if the new spouse has children of their own.
- Help fund college or other expenses for the children. By protecting the lives of both parents with permanent life insurance, your clients can ensure that the expenses for the children are taken care of. For example, if the former spouse is responsible for paying medical expenses, college expenses or other costs for the children, a life insurance benefit can provide essential funds if that spouse passes away. Permanent life insurance with cash value can also provide funds during the insured spouse’s lifetime, if cash is not readily available, to pay tuition while the children are in college or help adult children repay student loans.
As you work with clients to create a customized policy that works for them in the event of a divorce, there are a few other factors to consider. For one, consider permanent instead of term insurance. While term insurance may be less expensive, permanent insurance has the potential to accumulate cash value that can be drawn from the policy while the spouse is still alive, in addition to providing a death benefit.
You also may want to consider adding riders to customize your client’s policy. With a permanent life insurance policy and a long-term care rider, they have the flexibility to accelerate the policy’s benefit while they’re alive to pay for long-term care costs such as care in their home or a nursing home – helping alleviate any concern for divorcees about who will take care of them if they can’t take care of themselves.
Because divorce is so common these days, you may want to help your clients plan their estates with extra protections in mind. A carefully designed permanent life insurance policy can help your clients protect themselves, their income and their estate throughout their lifetime, even if they go through a divorce. Not only does permanent life insurance provide tax-efficient cash value growth and distributions, it can also be used to replace lost income, alimony or child support, pay for college or medical expenses for the children, or long-term care costs for the divorcee.
Trey Reynolds is head of life distribution for AXA Equitable. Trey may be contacted at [email protected].
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