Adding disability insurance to divorce settlements
By John Nichols
Disability Resource Group, Inc.
In the world of disability insurance, most financial advisors think of personal disability income protection. But this is only the beginning of the possibilities in which the advisor may be able to provide his or her services in safeguarding clients' businesses and assets. In this article, you will learn about the diversity of the product as it is applied in divorce settlements.
A niche was discovered in working with referrals from divorce attorneys. Most if not all settlements include division of assets and liabilities owned by the parties. Additionally, when appropriate — especially if there are children involved — there is an alimony agreement. What happens to the ongoing alimony payment if the payer becomes sick or hurt and unable to earn the income to make the support payment?
With the divorce rate at 50 percent or higher for U.S. marriages, there is an opportunity to protect the spouse and children with a source of income used for living and educational expenses. In divorce proceedings and negotiations, if permanent or limited duration alimony and child support are components of the possible settlement agreement, then life insurance for the benefit of the dependent spouse and children is a consideration and usually made part of the paying spouse’s continued obligation. In fact, the New Jersey legislature has specifically allowed for life insurance to be ordered by the judge to protect the dependent spouse in case of premature death of the paying spouse under N.J.S.A. 2A:35-25. The theory behind this additional insurance premium burden is that the untimely death of the paying spouse should not become the burden of society to support the dependent spouse and children.
However, there are no requirements regarding disability insurance in divorce settlements. A paying spouse is not under any obligation to obtain and maintain a disability insurance policy for the benefit of the dependent spouse or children. In New Jersey family law, divorce mediation strongly encourages inclusion of disability insurance as part of an overall divorce settlement.
Disability insurance is a voluntary insurance policy which pays monthly benefits to the insured if he or she becomes disabled by a covered risk and will still pay only a portion of the injured spouse’s gross employment earnings. We’re all familiar with the commercial of the quacking duck exclaiming AFLAC to all that will listen, yet most people don’t have disability insurance. Those few who have coverage seem to acquire it through their employers. Since the legislature failed to include provisions for disability insurance protection for the dependent spouse and there are no New Jersey divorce court cases which deal squarely with this issue, New Jersey divorce attorneys representing paying spouses generally do not allow a disability insurance provision to be included in the divorce settlement agreement.
The consequences of not having a disability insurance policy in place on the paying spouse could cause severe economic hardship to both spouses and their children. Generally, when an individual becomes disabled because of a non-work-related injury, such as a medical condition (heart attack, stroke, cancer, etc.), the paying spouse’s recourse is to seek Social Security disability benefits. These benefits only provide for a small fraction of the paying spouse’s prior employment income. The reduced funds available to the payer and dependent spouse are further burdened by the likelihood of increased medical bills.
Insurance is always a gamble. Premiums are paid for coverage for a possible future occurrence. In some instances, the government requires us to purchase certain types of insurance, such as liability coverage on our automobiles, in case we damage property or inflict injury upon someone. In other matters, our mortgage lender requires fire and casualty homeowner’s insurance should the house catch fire or become damaged by harsh winds. With the long-term view toward protection and stability, divorcing couples and their respective attorneys should seriously consider the possibility that the paying spouse could become disabled during the alimony and child support obligation periods. Although a paying spouse may be reluctant to pay additional insurance premiums for the benefit of his or her ex-spouse, there is a strong possibility that the paying spouse would look more willingly to providing protection and stability to the children and himself or herself. Disability insurance is affordable and can be obtained in different coverage amounts, such as the amount equal to the cost of the monthly child support payment or just the cost of the monthly alimony obligation. Disability insurance must be a topic for discussion during the active divorce settlement conversations so that the divorcing couple may fully understand the possible future scenarios which can adversely affect them.
Think about it, you stand about a 30 percent chance of suffering a long-term disability between now and the age of 65 that will last for 90 days or longer. The average length of a disability is 3.2 years, so what would happen to an alimony payment if the person responsible for making that monthly payment was unable to work for an extended period of time because of a sickness or injury?
There are several major types of disability insurance in the market today. One can have group long-term disability (LTD) available through work, a plan through a professional association or an individually owned disability insurance policy that a person bought directly from a major insurance company. Hands down, an individually owned policy is going to pay more benefits to people in more claims scenarios. They are also going to be a more expensive than group LTD or an association plan. If an individual wants to make sure that his or her alimony payment is protected even if the ex-spouse becomes disabled from an unexpected stroke or car accident, make sure that part of the final divorce agreement has a provision that he or she must own and maintain an individual disability insurance policy for the entire duration of the alimony payments.
Over 90 percent of individual disabilities today are caused by critical illness, not because of accidents. Nobody sees a major illness coming unless they are highly overweight and a chain smoker. Diabetes, heart disease, back and neck problems, cancer, stroke and MS are all major illnesses that just appear, regardless of what you do for a living. I am sure you would feel terrible about asking your ex-husband or ex-wife for your alimony payment after they were diagnosed with cancer, but that is what the individual policy is for in the divorce settlement.
It really is a small part of everything that you have to negotiate and think about during a divorce, but it can have such a large impact on your financial world should one of you become disabled later on.