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How a life insurance policy can protect children after divorce

When parents decide to pursue a divorce, both want to do what’s best for their children. Oftentimes people think of custody agreements or child support when considering what the child might need.

Yet there are ways to offer stability for minor children beyond those options, while accounting for one potential, tragic outcome: the death of a parent. And that’s through a life insurance policy.

How a life insurance policy can help

Family courts are concerned, first and foremost, about the wellbeing of any child whose parents divorce. While it might be disconcerting, consider this: what happens if the parent paying child support dies, and the surviving parent no longer has the means to care for the minor child? That situation would clearly be detrimental.

In an acknowledgment of this possibility, courts will sometimes order a parent to take out a life insurance policy. A separating couple may also agree to this as part of their Marital Settlement Agreement. The policy will generally be in effect until the child is an adult, with the child named as the sole beneficiary.

This life insurance policy is, in essence, to cover what a deceased parent would have paid in child support. It ensures a minor child is taken care of regardless of what happens to a parent.

Addressing potential complications

It’s possible this life insurance plan runs into some problems. For example, what if the parent that is supposed to buy a life insurance policy doesn’t follow through? Or, what if they change the beneficiary on the policy?

In these cases, a court may order the decedent’s estate to pay the child instead. That can lead to another problem, however. What happens if the estate can’t cover the cost?

It’s a question the Wisconsin Court of Appeals addressed. The court looked at a case where a divorced father died before his children turned 18. He had a $250,000 life insurance policy as part of a Marital Settlement Agreement, but switched the beneficiary to his new spouse rather than his children. After he died, the insurance money went to the spouse, and his estate was worth just a tiny fraction of the $250,000.

The Court of Appeals ordered the $250,000 be taken from the new spouse and placed into a constructive trust for the minor children. Why? Because the enrichment of the new spouse came at the detriment of the man’s children. As a court of equity, the family court needed to account for that.

Accounting for all possibilities

While the end result of that case was similar to what the parents had agreed to, getting to that point took time and resources. While it’s certainly a difficult conversation, it’s important to discuss these options with your spouse during the divorce.

You may want to consider putting specific language into the Marital Settlement Agreement to account for all these possibilities. It can mean avoiding a protracted court battle should one parent pass away.

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