Should I insure my child support payments?
You’re divorced, and you are taking care of your children through child support, but what will happen to them if you suddenly die? The purpose of child support is to ensure that children receive what is needed to maintain a decent quality of life, but this can quickly change if one parent passes away. Therefore, when ordering a parent to pay child support, the Illinois courts will generally require the parent who is obligated to pay child support to get a life insurance policy that covers the support amount.
Life insurance is a relatively inexpensive way to cover children’s needs when a parent dies. But setting up a policy is not that simple. Problems can occur if the supporting parent changes or eliminates coverage while alive. And questions arise as to who the beneficiary of the policy should be and who will manage the funds — the child directly, your ex-spouse, a trust, or a third party?
There are upsides and downsides for each solution, and setting a policy up incorrectly can lead to problems that rob your children of the funds needed for food, clothing, medical care and education.
If you find yourself in a situation where you are faced with insuring your child support payments, it pays to seek legal assistance. The compassionate and experienced Illinois family-law attorneys at Wolfe & Stec understand the stresses of divorce and recognize the concerns parents have for the well-being of their children and the importance of child support. We offer a free initial consultation to examine your individual situation and help identify solutions that are best for you and your family, including drafting a settlement agreement on your behalf.
Setting up Beneficiaries
In Illinois, both parents are responsible for supporting their children, and this obligation does not end even when one dies. There are several ways to set up beneficiaries for your insurance policy, and you need to find the one that works best for your situation. These include:
1) The Child as Beneficiary
In situations where ex-spouses are hostile or you don’t trust your ex to manage an insurance settlement for your children, you may be tempted to make your policies payable directly to the child. However, since in Illinois, children don’t reach the age of majority until age 18, they will not be able to receive the policy proceeds until then. Instead, the funds will be paid to a court-appointed guardian, which may well be your ex-spouse. This guardian or the surviving parent has a legally enforceable fiduciary duty to the children to use the life insurance policy for the benefit of the children until age 18. At that time, whatever is left in the guardianship account must be given directly to the child. Children who receive a lump sum of money before they are mature enough to handle it properly are capable of blowing it all and being left without the funds for essentials like education.
2) Custodian as the Beneficiary
If you do not feel you can trust your child or your ex as beneficiary, you can designate someone you do trust as “custodian” for the benefit of the child under the Uniform Transfers to Minors Act (UTMA). Custodians may not use the insurance funds for themselves, but must manage them for the children to pay for living expenses and education. When the children reach the age of majority, any funds remaining go to them directly. If you take this option, you will need to craft your policy carefully to make sure the insurance company acknowledges the custodian as the beneficiary of the policy for the children. Policies can also be paid to a revocable or irrevocable trust for the benefit of children.
3) Ex-Spouse as the Beneficiary
If you have enough faith that your child’s other parent will properly use the funds for the benefit of your mutual children, you may want to designate that ex as the beneficiary of your policy. There are downsides, however. Should your ex run into financial problems, these funds are not protected from creditors, so they can be affected by bankruptcy and even claims from a new spouse.
Concerns about Windfall
While you need to insure your support payments, you may want to avoid any method that allows a large life insurance policy paid to a child who is close to majority and not yet ready to handle a windfall of funds. A knowledgeable attorney can help draft a decreasing schedule of required policy proceeds by estimating child support and educational cost contributions at various ages.
Keeping the Supporting Parent Honest
Although most parents legitimately wish to provide for their children, there are times the support-obligated party may want to change the beneficiary of a policy in a way that prevents their children from receiving the needed funds. This can be prevented by setting up the policy so that the beneficiary owns it. The payor is still the “insured,” but the owner of the policy is the one with the right to change or not change beneficiaries. Who pays for the policy premiums could be worked out in the separation agreement
The insurance provision of a separation agreement should specifically provide for a number of things. The agreement should state that if the payor spouse (or payor parent) does not leave the insurance policy proceeds as required by the agreement, whatever is missing will be brought as a claim against the payor’s estate (as well as any other remedy provided at law, such as equitable claims and trustee actions) and that the estate must pay any attorney’s costs incurred in enforcing this provision.
The separation agreement should also specify that if subsequent life insurance policies are purchased, they shall be deemed to be intended for the benefit of the payees (the child and/or the child’s surviving parent) under the current separation agreement to the extent of the support amounts or policy face amounts required under the agreement. This means that the prior obligation cannot be avoided by buying new policies and canceling the old one. In order to prevent unilateral changes in beneficiary designations and insurance policy amounts, the separation agreement should state that the payor spouse must give the other party yearly proof of insurance coverage, such as a copy of the insurance policy and current designations.
If life insurance is ordered or agreed upon, the amount of life insurance should correspond to the income of the parent paying support, the needs of the children and other factors. The key is to ensure that there is sufficient life insurance in place not only to substitute for the child support obligations, but also to cover other expenses such as health insurance, uncovered medical costs, extra-curricular activity costs, child care and contributions to college or post-secondary education.
Finally, the fact that one parent is required to pay for life insurance can and often does result in some offset for that parent. Court-ordered or agreed-upon life insurance premiums may be subtracted from the gross income of the parent obligated to pay support when determining the net income for child support purposes. Therefore, it does not have to be purely an added cost; the added cost can be offset by other things.
CONTACT US FOR HELP AND A FREE CONSULTATION
Child support laws can be complicated, and you will have to deal with the results for years. If you have questions about calculating child support, or modifying or appealing existing support orders, you should contact an attorney to be sure your rights are protected. The skilled Illinois family-law attorneys at Wolfe & Stec, Ltd. know the laws, the courts and the system and can guide you through the process. We represent and advise clients in all types of child custody matters and have a long history of success.
Don’t delay. For a free initial consultation with an experienced and compassionate DuPage County custody lawyer, contact us online or call 630-305-0222 for a free initial consultation.