Divorce is not only an emotional process—it’s also a significant financial event. From dividing assets to determining support obligations, there are many moving parts. One critical yet often overlooked component of a comprehensive Marital Settlement Agreement (MSA) is life insurance.
If you or your clients are going through a divorce, here’s why life insurance deserves a prominent place in the conversation—and how to structure it smartly.
1. Why Life Insurance Matters in Divorce
When a divorce decree includes alimony or child support, those payments are often essential for the recipient's financial security. But what happens if the paying spouse dies prematurely?
Without a life insurance policy in place, those future payments vanish—leaving the recipient and children potentially financially vulnerable.
Including life insurance in the MSA ensures there's a back-up plan: a source of funds that replaces lost support in case the unexpected happens.
2. Who Should Own the Policy?
One of the most common mistakes in divorce-related life insurance planning is having the insured also be the policy owner—especially if the insured is the paying ex-spouse.
If the recipient of the support (or custodial parent) owns the policy, they control:
- Beneficiary designations
- Premium payments
- The policy’s status
This helps ensure the policy stays active and the intended beneficiaries (often children) are protected.
Pro Tip: If the recipient owns the policy, the MSA should require the paying spouse to:
- Cooperate in the application process
- Undergo a medical exam (if needed)
- Provide proof of premium payments.
3. How Much Coverage Is Enough?
The life insurance death benefit should be calculated based on the present value of future support obligations. That means:
- Add up all expected child support and/or alimony payments over the term
- Consider inflation and any future college expenses
- Factor in any other obligations, such as remaining mortgage payments
Work with a financial planner or divorce financial analyst to run the numbers accurately.
4. Policy Type: Term vs. Permanent
For most divorce situations, term life insurance is appropriate—it’s cost-effective and matches the limited duration of many support obligations.
However, if the divorce involves long-term obligations or estate planning concerns, a permanent policy (like whole or universal life) might be more suitable.
5. What Should the MSA Include?
To avoid misunderstandings, your MSA should clearly specify:
- Amount of coverage required
- Duration of coverage (e.g., until children reach 18 or alimony ends)
- Who pays the premiums
- Who owns the policy
- Beneficiaries
- Proof of policy existence and payment
Also include language requiring annual proof of coverage. This avoids the unfortunate surprise of discovering a lapsed policy only after a tragedy.
6. What If Life Insurance Isn’t Available?
If the paying spouse is uninsurable due to health or age, other solutions include:
- Establishing a trust funded with cash or investments
- Securing other assets as collateral
- Adjusting the division of property to account for the increased risk
- Try applying for guaranteed issue life insurance without a medical exam
Final Thoughts
Divorce planning isn’t just about dividing what exists today—it’s about protecting the future. Including life insurance in the MSA is a powerful tool to ensure support obligations are met, even in the worst-case scenario.
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