Whether you are already divorced or in the throes of one, you should understand how to use life insurance to protect yourself and your family. Divorce is more common than it has ever been. Emotions run high and details are many. One common mistake in the execution of the divorce decree is how life insurance is handled regarding alimony and child support. Divorce settlements typically require that a life insurance policy be in place in order to protect the alimony/child support recipient against a premature death of the ex spouse alimony payor.
If life insurance is already in place on the alimony/child support payor, the payee should negotiate to be the collateral assignee of the death benefit. A collateral assignment provides a legal, economic interest in the death benefit of a life insurance policy that supersedes the primary beneficiary’s interest in the policy. A company provided form is completed by both parties and submitted to the insurance company. This notifies the company that the owner of the policy and the collateral assignee have a legal arrangement whereby, if the insured dies, the collateral assignee will be the first to receive life insurance proceeds prior to the death benefit being paid out to the named beneficiaries of the policy. This legal interest in the policy is a powerful tool in that the collateral assignee is notified if the policy is in jeopardy of lapsing. This is important because if the policy lapses, medical underwriting will be required to reinstate the policy. If the insured payor’s health has deteriorated since the time the policy was taken out, the insurance company may not reinstate the policy. It would be in the best interest of the payee to actually pay the premium in order to keep the policy in force. The collateral assignment beats relying on prayer and honesty for the alimony recipient’s well-being. The assignment can be lifted once the alimony/child support payments are made in full. Both parties must sign a release, giving control back to the owner/insured of the policy.