Life Insurance Needs Created by Blended Family Situations and by Divorce
Households headed by a single parent or a blended family that includes children from a previous marriage (of one spouse or both) now outnumber traditional nuclear families. Many blended families are formed following a divorce of one or both spouses. Along with a new family structure comes the need to plan for new financial contingencies such as the care of a surviving spouse in the case of a death, income replacement from a disability, alimony and child support obligations, and inheritance wishes and estate planning needs.
Here are the top ways life insurance solve problems and protects you, your family, and your financial commitments:
Avoids Forced Heirship. While both spouses are alive, everyone in a blended family may get along. This can change at the death of a spouse and a family can be torn apart over financial matters. When this happens, it is not unusual to find that the bulk of a couple's assets pass to the surviving spouse on the death of the first. Often, the children of the deceased spouse may not be provided for as the deceased spouse would have wanted.
Conversely, if assets are left to the children at the death of their parent, there may be insufficient assets to provide for the surviving, non-parent spouse while possibly triggering transfer taxes, to boot. In addition, without proper planning, most states require that a portion of an estate, usually half, be left to a spouse, or a surviving spouse can make a claim against the estate that may undermine the intention of leaving assets to the children.
Life insurance can provide estate equalization and peace of mind that inheritance intentions will be fulfilled. By establishing an irrevocable Qualified Terminable Interest Property (QTIP) Trust in conjunction with life insurance, a grantor (spouse) can provide for a non-parent surviving spouse and retain control of how the trust's assets are distributed once the surviving spouse dies while taking care of his/or her children from a previous marriage.
Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that the spouse is taken care of for the rest of their life. At the death of the non-parent surviving spouse, the principal in the Q-TIP is left to the children of the grantor (spouse).
If the non-parent surviving spouse is close in age to the deceased spouse’s children from an earlier marriage, the wait to receive the remaining trust principal could be decades. To mitigate this timing issue, life insurance can provide an instant inheritance for the children.
Meet Alimony and Child Support Obligations. Although many alimony commitments end at the death of the payor spouse, some agreements call for the balance to be paid in a lump sum from the estate, jeopardizing the payor’s current family’s nest egg. In other situations, the payor may voluntarily want alimony to continue upon their death.
Similarly, a payor may either be obliged, or desire, to continue to support children from a previous relationship while providing for their current family. A life insurance policy is a solution, providing money for the care of a former spouse and maintaining child support.
Provide for Long-Term Care. Statistics show that 70% of those who reach age 65 will need long-term care, which Medicare only covers for a limited timeframe.
In-home care or assisted-living care is expensive, and most experts believe costs will only go up. Excluding specific market variations, the average cost of a nursing home ranges from $60,000 to $120,000 a year; hiring an aide to spend six hours a day in your home starts at around $40,000 a year.
Your former spouse’s long-term care costs could fall to your children. By purchasing a single-premium long-term care (LTC) policy, you can eliminate this burden. Single premium LTC Insurance plans are just that – you pay a single premium, and you are done paying premiums on that policy. Hybrid LTC + Life Insurance plans are an elegant solution to mitigate the financial and emotional risks of long term care.
Avoid Probate. Life insurance is paid directly to your beneficiaries, and it doesn’t go through your will or through the probate process. Policy benefits are typically paid much faster than the time it takes to settle an estate – usually by several months or more.
During that time, there are still bills to pay, mortgage payments to make and many other expenses to meet. Those costs can put a strain on your family while they’re waiting for the estate to be settled. One in four people say they would feel the financial effects within a month if the primary wage earner in their household died, according to the 2020 LIMRA study. By contrast, life insurance claims are typically paid swiftly once your beneficiaries submit a claim, giving your family the liquidity they need during a challenging time.
Your Existing Life Insurance
At the time of a marriage or divorce, it is important to have your existing life insurance inventoried and reviewed. Cash value in policies can be considered a marital asset and included in any financial calculations. Beneficiary designations may need to be updated to reflect a current spouse and to protect children from a prior relationship. There may be significant value from the life settlement of a term policy that would otherwise be allowed to expire worthless.
Too often, life insurance is purchased for a specific purpose and left untouched (and even neglected) without periodic review. A divorce and a blended family can change your life insurance needs. Whether your life insurance is on track, needs adjusting or if there are better policy options, our experienced team at Cedar Point Financial Services LLC can help.