There are many life events that provide impetus for people to shop for life insurance. A wedding, the birth of a child, entering into a loan or business partnership are all common drivers for buying coverage. Another reason, perhaps less often thought of, is divorce.
It is typical that as a result of a divorce decree as determined by a judge or mediator, one of the parties will be required to purchase and maintain life insurance coverage. The amount of coverage and the duration for which it must be kept in force is usually driven by the amount of alimony and/or child support that is to be paid and for how long the payments are required to be remitted. The purpose of the life insurance is to protect the individual who is to receive these payments from the risk of losing future income as a result of the death of the payor.
While some divorces are amicable, it may be true that very few are awash in magniminity, which means the person paying the alimony and/or child support, and thus the insurance premiums, will usually make some effort to avoid providing much more than is required by the divorce decree. Since automatically decreasing death benefit life insurance is now a rarity in the marketplace, keeping the death benefit equal to (and not more than) that of the remaining payments owed to the ex-spouse could present a challenge. However, by paying attention to the status of your policy as time goes on and by doing a little extra paperwork from time to time, the insured can limit the amount of death benefit assigned to his/her ex-spouse and avoid any significant generosity above what is required by the court.
There are two primary methods for reducing the death benefit appropriated to any one individual. First, reducing the overall death benefit of the life insurance policy is the most straight forward way of reaching this goal. Reducing the overall death benefit also has the attractive feature of reducing the premium payments that the insured must pay to the insurance company. However, most carriers do not allow for face amount reductions in the first year of coverage, if not longer. Additionally, all carriers have minimum face amounts (most are $100,000), so if the overall obligation to the ex-spouse is less than the minimum face amount, a simple reduction may still result in a benefit above what is required by the court.
The second option, which can be used in conjunction with the first, is to change the beneficiary allocation. If you cannot reduce the face amount of coverage to an amount equal to what is owed to the ex-spouse, you can add beneficiaries to the policy and designate a percentage of the benefit to these other individuals. For example, a child, current spouse, or charity could all be acceptable options for assigning excess death benefit to someone other than your ex-spouse. While the additional beneficiary strategy does not reduce premiums it is something that you can do early and often during the life of the policy.
Both of these methods, especially if employing frequently, require a higher than normal amount of administrative work on the part of your insurance broker, after the sale of the policy. So, it is best that you are up front with your plans to use these methods when discussing your needs with a prospective insurance agent or broker.