February 6, 2017
Divorce, unquestionably, is an emotional process. If you happen to be in the midst of one now, you know that it’s hard enough to plan financially for the here and now, let alone for the unpleasant what-ifs of tomorrow. One of my responsibilities as an independent financial advisor is to help clients remove emotions from a situation in order to create clarity and peace of mind for their future.
When working through a divorce settlement, family law attorneys regularly take into account the unlikely event of a premature death and factor in a life insurance policy to support the family’s needs and financial obligations. But in reality, a person is roughly four times more likely to suffer a disability than die before retirement, according to the Social Security Administration.
Therefore, making sure disability insurance is in place to help cover child support and alimony payments is important. Yet, the median coverage of long-term disability insurance is only 60% of an insured’s income, according to the U.S. Department of Labor, which may not be enough to cover all financial obligations of a divorce agreement.
Luckily, there is another form of asset protection that may play an equally important role in protecting a family’s financial independence — divorce disability insurance.
When going through the divorce process, particularly where one spouse is the primary wage earner, both the wage earner and future recipient of support payments should have an interest in protecting the income stream in the event the payer suffers a permanent disability. It is even more important when there is a single, high-wage earner supporting a family’s financial needs.
Divorce disability insurance covers the expenses outlined in a divorce settlement when the payer becomes permanently injured. A limited number of carriers offer this specialty coverage either through personal lines or as contract-guarantee insurance. Premiums could be paid for by either the insured or the beneficiary.
Consider this situation…
John and Jill are going through a divorce. Jill is the primary breadwinner and provides the majority of the financial support for the family, including three young children. As the divorce unfolds, John is awarded alimony and child support, amounting to thousands of dollars a month. During the process, the couple, with their attorneys, reviewed their life insurance policies and confirmed adequate coverage exists in the event of a premature death. But what happens if Jill becomes permanently disabled?
If that should happen, Jill could be forced to liquidate personal or business-related assets in order to meet ongoing support payments. Jill could go back to court and attempt to reduce or otherwise modify the support payments. But this process can be time consuming and costly, not to mention stressful as Jill would still be coping with her new disability, and it will likely re-open emotional wounds that led to the divorce. Besides, Jill wants to be sure her children continue to have the lifestyle they currently enjoy.
A better alternative is for John and Jill to plan ahead by protecting the income stream and Jill’s ability to make support payments in the event of a disability. Divorce disability insurance would help provide continuity with respect to the level of support John expects to receive.
Most attorneys will agree that planning for disability is an important aspect of the divorce process. If you’re going through a divorce, ask your family law attorney and financial planner about disability insurance and whether additional divorce disability coverage makes sense for your situation. Understand that every divorce is different, and providers may be able to customize a policy to meet your specific needs.
If such misfortune should happen, having extra divorce disability insurance coverage could bring peace of mind to both sides that the family will be taken care of financially.
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