Life insurance plays an important role in New Jersey divorce matters, as it can help protect alimony and child support obligations, or even pensions and other equitable distribution assets.
Negotiating Life Insurance Obligations
Not too many people find insurance all that interesting. For most of us, it’s something you often need, but not something you like to think about.
Accidental death. Life insurance. Health insurance. These are the expenses that seem to only pay out when something bad is going on.
I’m no different. In my personal life, I’d rather not think about insurance. But when it comes to a New Jersey Divorces, insurance can play an important role during a divorce and during divorce negotiations. In this post, I’ll explain a few of the basics of life insurance and how they relate to a New Jersey divorce.
Types of Life Insurance
There are all kinds of life insurance vehicles, but for the purposes of this discussion, I’m going to limit it to the basics: whole life and term life.
More exotic types of life insurance exist but are beyond the scope of this discussion. The important distinction is that whole life insurance has an equity component—an amount that can be “cashed in” whereas term life insurance merely contains a death benefit.
A. Term Life Insurance
Term life insurance is less expensive and merely contains a death benefit. There is no value to a term life insurance and thus it will not factor into equitable distribution.
B. Whole Life Insurance
Conversely, whole life insurance may have a value aside from its death benefit. In most cases it will possess a value subject to equitable distribution in a New Jersey divorce. For this reason, whole life insurance is generally more expensive than term life insurance. It may also be possible to borrow against whole life insurance.
Life Insurance During Divorce Process
While a divorce is ongoing (known as the pendente lite phase of a divorce), applicable New Jersey laws require that each party maintain the “status quo” of the marriage. The same holds true for life insurance and other types of insurance such as health and car insurance.
For example, if the Wife always maintained and paid for term insurance naming the children as beneficiaries, then she must continue to do so throughout the divorce process. The parties must also provide the Court with insurance information after a divorce complaint is filed.
Life Insurance During Divorce Negotiations
Life insurance will factor heavily in two sections of the Marital Settlement Agreement: (1) Equitable Distribution and (2) Life insurance obligations.
Equitable Distribution and Life Insurance
As stated above, if a life insurance has a cash-out value—such as in most whole life plans—then that value will be subject to equitable distribution. Note, I am not talking about the value of the death benefit, but rather any equity built up with the insurance. If the insurance is term life, then it will not be subject to equitable distribution because it will have no cash surrender value. It would only pay out in the instance of the death of the insured party.
Protecting Alimony and Child Support
Life insurance will also often play a role in protecting alimony and child support. It may also be required to protect other expenses such as college costs.
For instance, if the Marital Settlement Agreement grants the Husband alimony in the amount of $1,000 per month, and it is expected that this alimony will continue to ten (10) years, then the Agreement should require the Wife to maintain life insurance naming the Husband as beneficiary in an amount sufficient to protect that alimony interest. In this case, about $120,000.00.
The amount may be reduced each year in proportion to the decreased amount expected to be owed. The same could be applied to child support or college costs.
So, after that exciting review everyone drink a strong cup of coffee and then let’s regroup onto the next topic!
Partner with Carl Taylor, Esq.
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