A Term Life Insurance Contract offers the simplest form of an insurance product that can grow, or be “built” as the insurance professionals say, to become a very complex product. Term Life Insurance means the consumer is contracting with an insurance company to buy a Death Benefit. As long as premium is paid, and anybody can pay the premium, the insurance company will pay the Death Benefit, under the terms of the contract. In so many situations, I have found Term Life Insurance a simple way to guarantee full value of awarded spousal support. This guarantee is effective regardless of the duration of the support or whether or not the awarded support is modifiable. The Term Life Insurance contract guarantees the payee spouse receives support in the event the payer spouse passes during the duration of the awarded spousal support. As an example, say the award is $2,500/month for ten years. The Death Benefit, also called the Stated Amount would be $2,500 x 12 months = $30,000/year x 10 years = $300,000. Please remember when completing the Insurance Application, the payee spouse, the spouse receiving the support, should be titled as the Owner as well as Primary Beneficiary of the contract. Secondary Beneficiaries are at the discretion of the Owner. The Insured should be the payer spouse. Premium is typically paid directly by the Insured, the payer spouse. Premium is not to be included as spousal support. In the event payment is not received by the insurance company, notification will be sent to the owner of the contract.
Other solutions to guarantee the payment of Spousal Support could involve reallocating certain higher risk asset classes, such as equities, to lower risk asset classes, such as shorter term US Treasury securites. After reallocating, these assets can be titled exclusively to the recipient spouse. Or, perhaps title these reallocated assets to some kind of trust? I feel confident saying most of these other solutions carry significant costs, including but not limited to legal fees, transactional fees, investment advisory fees, and taxes. Adding these up serve to reinforce the advantage of using a term life insurance contract. However, the Net Present Value of the reallocated assets might well offer an advantage, especially to the payer spouse. Let’s go back to the example above, $300,000 total spousal support over ten years. Net Present Value has to do with the current value of the future sum by adjusting for interest rates and inflation. The payer spouse will say, “I can put away a certain amount of money today, less than the $300,00, earning a certain interest rate, that will grow over the ten year period into the full amount.” So, the higher the interest rate the payer spouse feels can be earned, and/or the lower inflation rate assumed, the less money needs to be allocated at the present time. Perhaps only $200,000? The payee spouse will usually say, “Is that truly a safe rate of return? But what about Inflation? What will things cost, assuming even a low rate of inflation, over the next ten years?” These are both valid positions. The deciding factor can initially be determined considering the age and health of the insured, the payer spouse.
Term Life Insurance offers the consumer an opportunity: For a certain amount of money you can buy a specific Death Benefit for a period of time. This is common sense, no need for actuarial tables: The payer spouse, for example, is 55 years old and needs to guarantee $300,000 for the next ten years. Of course the 55 year old is more likely to pass within the next 10 years than, say a 30 year old. The insurance company will certainly base premium on the likelihood of the insured dying within the time frame of the contract. Age, health. family history, high risk activities, smoking, and several other factors enter into the decision as to whether to insure, how much of a Death Benefit to offer, and how much premium to charge. The 55 year old might not qualify for $300,000. Or, the premium for a 10 year contract might be very high. If this is the case for the 55 year old, clearly premium for the required death benefit should be compared to costs associated with alternatives. One alternative is described above, reallocating asset classes; other alternatives are available.
Caveat: When making tax and investment decisions, including but certainly not limited to reallocating assets, financial or otherwise, please be sure to use Licensed and/or Certified highly qualified professionals. Life Insurance, even the relatively simple Term Life contract, can become extremely complex while not being very transparent. Again, please be sure to retain a highly qualified licensed professional, preferably a multi-line life insurance broker. For your protection, please be sure your agent or broker carries Errors & Omissions Insurance.