"Alimony insurance is essentially a life or disability insurance policy on the ex-spouse that is paying the alimony and requires the agreement of that ex-spouse. It also requires an annual premium payment to the insurance provider, but it effectively guarantees your income."
During a divorce, alimony can be a troubling topic, which can escalate the tension in a given room. The idea of giving any amount of money to an ex-spouse can be a lot to process. Even for some, receiving money from an ex-spouse can force one to swallow his or her pride, due to all of the water under the bridge.
It’s gotten to the point in many divorce settlements, where one spouse’s finances are so depleted that they find themselves reliant on consistent payments of alimony to supplement their income. In these situations, the slightest inkling to an irregularity in the permanency of the payments could cause a moment of panic for a spouse that finds themselves unable to financially protect themselves, according to Susan Bradley and Mary Martin’s book, “Sudden Money: Managing a Financial Windfall.”
The only course of action for that spouse is to look into what is referred to as “alimony insurance.” This is essentially a life or disability insurance policy on the ex-spouse that is paying the alimony and requires the agreement of that ex-spouse. It also requires an annual premium payment to the insurance provider, but it effectively guarantees your income.
Having the ability to buy this type of insurance is typically stated in the divorce agreement, but not only does the payer have to agree to them, he or she needs to submit to a physical and provide medical records.
Issues with insurance
One of the major issues with alimony insurance is the cost. Not only is it expensive, but the cost of it changes over the years, and considering how important it is, in order to supplement your income, you could need it for many years. It also requires you to be discerning when choosing the right alimony insurance policy for you.
Given the length of time you might need it, it can be difficult to switch to a different policy down the road. Additionally, any change made in which policy is selected has to be approved by both ex-spouses, so getting an ex-spouse to agree to the switch years later may prove difficult.
If you can convince your ex-spouse to agree to alimony insurance, the insurance needs to be added to the annual budget, which also will factor into the alimony amounts decided by the courts. There also is a tax on the insurance, until the ex-spouse paying the alimony dies or becomes disabled. Then, the insurance proceeds become tax-free income.
There also are circumstances, in which the policy would not be an option. These circumstances include pre-existing health conditions that render the insurance premiums cost-prohibitive to secure the alimony obligation that alimony insurance entails.
Trust vs. insurance
Many financial experts view alimony insurance as an alternate option to an alimony trust. According to Tax Analysts, an alimony trust is a vehicle that is generally established for the payment of a support obligation of one spouse or former spouse to another and that may provide a security fund for payment of the obligations beyond the lifetime of the payer spouse, also known as the obligor spouse.
This method acts like an alternative to alimony, which also creates alternative tax consequences. Alimony trust is different from alimony insurance, but the two are often confused for one another. That can be dangerous when drafting a settlement agreement and is something to look out for. One concept has to do with the protecting of the alimony, and the other is more concerned with the payment of the alimony.
The possibility of reversion of the alimony insurance policy also exists, according to the California Franchise Tax Board. These circumstances occur if the recipient dies before the payer, the policy would revert to the payer, and at the maturity date, the proceeds of the alimony insurance policy would be paid to the payer, unless the latter was still obligated by a court order to support the recipient. This means that the payer still has to pay off the remainder of the monthly insurance payments on themselves until the policy is up.
There is another alternative to make sure that alimony payments are reliably kept: through having the payer purchase an immediate annuity, which pays the recipient a fixed amount of money each month. This is a contract with an insurance company that requires the payer to give the insurance company a sum of money and they make the payments to you for a given amount of time. It simplifies and guarantees the payments, as well as making it so the payer is not writing the recipient an alimony check every month.
However, the risk is in the payer having that sum of money ahead of time. Many cannot afford to fork over that much money all at once. Additionally, the status of the insurance company’s finances also comes into play. If the company is at risk for defaulting, the money might be lost.
With alimony payments during divorce proceedings, one must look out for their best interests. However, it can benefit both parties to seek out the certainty of these options, in order to better plan for their financial futures.