Don’t Overlook Risk Management in Divorce Matters

Don’t Overlook Risk Management in Divorce Matters

Insurance and risk management are not day-to-day concerns for most people. Few take the trouble to review their coverage periodically and implement needed changes (unless prodded by their agent or financial planner).  In the divorce process, family insurance is often overlooked during settlement negotiations.  However, insurance is just as important as alimony, asset division and child-visitation schedules.  Just as when the spouses were married, the underlying reasons for having insurance in place are still very valid; to replace income that is needed to support dependents or pay for unforeseen (and costly) life events.

It’s interesting for us to see spouses and their attorneys draw lines in the sand when engaging in strategic warfare over alimony or asset division, then fail to review insuring the payments the recipient spouse depends upon for future living needs. The paying spouse may fully intend to faithfully comply with his or her obligations, but Fate may have other plans that neither spouse anticipates.

Health insurance is a particular concern.   Most settlement discussions do include health insurance continuance, but the laws and options can vary from state to state and are sometimes misunderstood by the spouses and even their attorneys.  Due to increasing costs and recent changes, (such as The Affordable Care Act of 2012, aka “Obama-care”), this can be a very complex area.

In RI, there exists the misconception that the Insurance Continuation Act guarantees that a non-participant ex-spouse must be kept under the employee-spouse’s coverage.    In fact, the law does not stipulate any such guarantee; it only encourages continuation and outlines what the health insurer may or may not do depending upon the divorce decree.   Due to increasing costs of healthcare coverage, many private-sector plans may exclude ex-spouses from coverage even though the children of the marriage may still be included under the employee-parent’s plan.  The only options remaining are for excluded ex-spouses is to purchase extended (and expensive) COBRA coverage or shop for new coverage.   In addition, as of January 1, 2014, the spouse of a RI state employee is no longer allowed to remain on the state health insurance program after divorce.  This means the ex-spouse will need to find their own health insurance, presumably under the state-sponsored programs administered under the Federal Affordable Care Act if they are not employed or their own employer does not provide coverage.

In Massachusetts, healthcare is very different.  MA law does require employers to allow divorced spouses to remain on their healthcare plan with a few exceptions. Even if state law applies, this does not mean ex-spouses won’t be required to pay a higher premium.  In addition, under Federal tax law, an employer –benefit provided to an ex-spouse of an employee (such as healthcare) is taxable to the employee !  This little-known tax fact and the potential for higher premiums or changes in coverage often require careful analysis and consideration during divorce discussions. It may be crucial for an advisor such as a CDFA™ or an attorney to review what options the healthcare plan offers to divorcing spouses.

Life insurance is another overlooked area.   You may not care whether your ex lives or dies after the divorce is final, but life insurance (ideally owned by the recipient spouse) is usually needed to cover the future payments of spousal and child support in case of premature death of the payer-spouse.  Depending upon the payment period, the coverage needed may be significant. A few years of monthly support may require $250,000 or more of coverage.  Careful calculations of “present value” should be used that include inflation and rate of return assumptions.  Don’t forget life insurance on a custodial parent as well. Their income and care-support for the children are valuable too, since the non-custodial parent may not be able to afford total care for the children by themselves. In addition, disability insurance should also be reviewed. If the payer-spouse cannot work due to illness or injury, these obligations may be suspended or cease altogether.

Since insurance matters is an important part of financial planning, having a Certified Divorce Financial Analyst/Planner as part of your divorce team to navigate through these complex issues can be advantageous, helping you avoid the myriad of land-mines that go along with risk management and ensuring that your income and future financial goals are protected.

Read other articles we have published in the Rhode Island Women’s Journal, or contact us via our Contact Us page to receive other free articles and information about divorce finance and planning.