A Smart Solution for Court Ordered Life Insurance
John and Mary were in the process of a divorce. They had two small children and a newborn baby. Mary received custody of the three children and John was required by the court to maintain sufficient life insurance coverage for Mary’s benefit for the next 20 years. John purchased a 20 year term insurance contract. Over the course of the next 20 years, John paid thousands of dollars in premium payments and then cancelled his coverage when his support obligation ended.
Often times, divorce is accompanied with a wide range of financial requirements—attorney bills, court fees, child support obligations, and court ordered financial obligations. A common requirement when minor children are involved is for the non-custodial parent (or former “bread winner”) to maintain life insurance for the benefit of the custodial parent for a certain period of time. Life insurance provides an important income tax free death benefit in the event of the non-custodial parent’s death. The death benefit can help the living parent pay for daycare, daily expenses, school activities, and college expenses. Ultimately, the insurance is meant to protect the well being of the children in case of a parent’s untimely death.
When financial obligations such as maintaining sufficient life insurance coverage are required, most people aren’t thrilled at the thought of paying additional insurance premiums for the next 10 to 20 years, or until their children are grown. Many insurance companies are beginning to realize this and have come up with beneficial solutions for their customers. In the story listed above, John paid his premiums for 20 years, but when he dropped his policy, he had nothing to show for it. John could have purchased what is called a Return of Premium (ROP) term insurance contract, naming his wife as beneficiary, pursuant to the divorce agreement. With a 20 year ROP term insurance contract, if John is alive at the end of the 20 year term period, the insurance company gives him a tax free refund of all premiums he paid. Not only do the children receive the financial protection they need, but John fulfills his life insurance support obligation and gets all of the premiums back after 20 years!
Talk to your insurance or financial advisor to find out if a Return of Premium term insurance contract makes sense for you.
Written by Amy Edgren, CLU
More information about Amy Edgren or to get in contact with her:
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