It is typical for divorce agreements to contain a provision requiring an alimony payor to maintain life insurance to secure his alimony obligation and one, if not both parents to maintain life insurance to secure their obligations to their children. In fact, Jennifer Millner, a contributor this this blog, and a partner in our Princeton office, recently did a post entitled Child Support Obligations Live on After Death, addressing what happens when a support obligor does not have the required life insurance at his death.
It is also typical for someone to cover their life insurance obligations through insurance they get as a benefit of their employment. Many companies, for example, offer as a benefit, life insurance – one times their salary, three times their salary – for example. What happens when someone leaves their job and loses this life insurance?
That issue was addressed by the Appellate Division in an unreported (non-precedential) opinion released on April 1, 2011 in a case entitled Starr v. Starr. In this case, to secure his alimony, in the divorce agreement, it provided that, "Defendant shall designate plaintiff as a beneficiary of $150,000.00 of the proceeds of the group life insurance made available to him through his employment." However, in 2005, he was given notice that his employment was terminating. He did have the option of converting his group life insurance to an individual policy but he did not.
Upon learning that the husband had not converted his policy, the wife filed a motion to compel the husband to obtain the required life insurance. The husband opposed it claiming that the life insurance set forth in the Agreement was no longer available to him and the plain language of the agreement "…did not require him to obtain an "individual or non-employment group life insurance policy" for the benefit of plaintiff."
Both the trial court and Appellate Division disagreed with the husband’s position holding that the
clear purpose of the life insurance provision in the JOD was to secure defendant’s alimony payments. The court also found that defendant had a continuing obligation to secure his alimony obligation.
The Appellate Division also cited the statute creating the justification for the security. The Court also noted that the purpose of life insurance is to assure a sufficient fund for the payor’s support obligation should he die before fulfilling that responsibility. Further, the function of alimony can be maintained after the obligor’s death by substituting insurance proceeds.
The lesson to take from this case is that if work related life insurance , which may be provided at little to no cost to the employee, is going to be the insurance used in the Agreement, the parties should specify what should happen if this insurance is no longer available. In this case, the husband had the ability to convert the policy but that is not always the case. Moreover, if the policy is converted from a group policy to an individual policy, the cost to the employee can go up dramatically. Thus, if it is the parties’ intention that the work related policy be maintained only so long as it is available through employment at little or no cost, they should say so in their agreement.
Another issue that comes up from time to time is that someone has a term policy that either expires or the cost increases greatly such the the new premium or a new policy would be cost prohibitive. Now, if a person does not have a support obligation to secure, this may be no big deal and they can choose not to have insurance anymore. However, the problem arises if they have to secure alimony or child support.
In a situation where someone has a term policy that expires or has an increasing premium at a certain age, at the time of the divorce they may be better served to go out and get a new policy that covers their needs into the future, before the premiums become cost prohibitive (or even worse, before they can no longer get insurance). Similarly, one must give serious consideration as to whether they want to use work related insurance to cover their obligation so that they are not in the same boat as Mr. Starr was in this case.