Securing Spousal Support Payments With Life Insurance
Introduction
Determining the quantum of security required for spousal support payments can be a complex task. It is crucial to ensure the recipient's financial stability, particularly if the payor passes away unexpectedly. One effective solution to secure such support payments is through life insurance. This blog post will discuss the initial quantum of security, the decrease in the quantum required over time, and the impact of estate payments on this process.
Quantum of Security Required at Outset
The initial quantum of support required is typically the highest, as it represents the total value of the obligation over the recipient's lifetime. It can be calculated using specific software tools, which provide an estimate of the required life insurance to secure the support. For instance, if a person is obligated to pay spousal support, they can maintain a life insurance policy with the recipient as the sole irrevocable beneficiary, ensuring the financial security of the recipient.
Decrease in Quantum Required Throughout Life of Claim
As time goes on and periodic support is paid, the remaining value of the claim decreases. Consequently, the quantum of security required also decreases. This decrease should be reflected in the drafting of security clauses in agreements. A step-down security clause could be drafted to reduce the face value of the life insurance policy as the payor ages and the remaining value of the claim decreases.
For example, a step down security clause can be drafted as follows:
Life Insurance to Secure Support
Richard shall maintain a life insurance policy with Janet as the sole irrevocable beneficiary for so long as he is obligated to pay spousal support.
Richard is presently 45 years old. Richard’s life insurance policy shall be in the amount of $250,000 until such time as Richard reaches the age of 55. Upon turning 55, Richard may reduce the face value of his life insurance to no less than $150,000 until he reaches the age of 65. If Richard still has a spousal support obligation at the age of 65, he may reduce the face value of his life insurance to no less than $50,000 and shall keep it in place until his support obligation ends.
Payments by Estate of Payor
In the event of the payor's death, if the estate has been provided as security, any support payments made by the estate will not be tax deductible for the estate nor taxable for the recipient. Therefore, it may be necessary to calculate the amount of support being paid net of tax and specify that this lower amount would be paid by the estate in the event of the payor's death.
Conclusion
Securing spousal support payments through life insurance can provide financial stability and peace of mind for the recipient. As the quantum of support required decreases over time, adjustments can be made to the life insurance policy to reflect this. However, should the payor pass away, payments made by the estate must be carefully considered to avoid tax implications. Thus, careful planning is crucial in drafting agreements to cover all eventualities.
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