Parties that are crafting an alimony settlement should consider the future consequences of an interruption of the negotiated income stream.
Alimony is dependent on the capacity to pay a stream of income from one party to another. If the alimony is sourced from earned income, then there is a risk that if the payor’s earned income were to be disrupted or ended due to death or disability, the payee’s income stream will end.
The parties should consider using insurance to guarantee the stream of income over the required period. To protect the income stream in the event of death, the parties can agree to purchase new life insurance to guarantee the stream of income. Assistance from a financial professional will likely be needed to determine the appropriate death benefit amount of the life insurance to guarantee the income stream for the agreed upon payment period.
For both life and disability insurance specifications that are part of the settlement agreement, the parties will need to consider who is responsible for the payment of premiums. Both parties should request copies of premium notices. There might need to be language in the agreement covering circumstances where the responsible party does not pay the premium. If the primary payor is not paying for any reason, is the payee allowed to pay premiums and eligible for reimbursement?
There should be clarification as to which party will own the policy. The payee may want to own the policy to provide the most control and make certain premium payments are being made. After the alimony period ends, the payee owner may want to continue the policy and will have the option to continue paying premiums.
Another option is to consider whether an existing life insurance policy can be assigned to the alimony payee recipient for a period. The assignment of the death benefit will have to be removed if the insured lives for the entire alimony period and should be agreed upon in the settlement agreement. The payee spouse’s authorization will be needed to release the assignment.
If there is existing disability insurance in effect, then parties may want to discuss if this is sufficient to support the payor’s lifestyle needs as well as the alimony commitment to the payee.
When there is insufficient disability income benefits parties may want to consider purchasing the coverage on the payor party. Disability insurance is typically expensive and is highly dependent on the health status of the insured payor. Depending on the length of the alimony payment period, the insurance policy may be customized for a period of payment. Or, the parties can purchase a longer period with the insured continuing the policy after the alimony payment period ends.
Here again, the owner and premium paying status notification should be agreed upon as part of the settlement agreement.
If alimony is sourced from an asset, then the need for insurance protection may be significantly less. The financial professional can calculate the amount of assets required to pay the alimony amount for the duration of the payment period. A fixed period annuity could be a potential solution that guarantees payment.The settlement agreement may want to consider the need to add assets if the balance declines to a certain level to enhance the certainty that the income stream will remain. In addition, the agreement may want to consider the consequences if the payee party dies in advance of the end of the payment period.
About Jeff Metz
Jeff Metz, MT, CFP – jmetz@rtdfinancial.com
Jeff is an equity partner and Senior Financial Counselor at RTD Financial Advisors. Jeff graduated from Case Western Reserve University with a degree in Chemical Engineering. Jeff has a Master in Taxation degree from Villanova Law School, with an emphasis in estate planning. Jeff is a member of the National Association of Personal Financial Advisors (NAPFA), the Financial Planning Association and Financial Therapy Association. Jeff enjoys the opportunity to offer counseling that creates convergence in the actions taken to produce real financial progress and achieve peace of mind.
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