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The Companion Advisor:
General Interest
The ex-spouse, child support and
the insurance policy
By Suzanne L. Michaud, LL.B
Marriage breakdown and the designation of beneficiaries
of insurance policies often produce disastrous results. The recent Ontario
case illustrates some of the pitfalls.
A mother and father separated in 1991 and divorced in 1992. The mother
received custody of there 3 children. The father agreed to pay child
support. In the separation agreement, he agreed to protect the support
payments by life
insurance policy on his life in the sum of $150,00 with his children
designated as beneficiaries.
The father did not pay the child support and did not take out the life
insurance as promised. He did take out a new insurance policy on his life
for $300.000, naming his new common-law law wife the beneficiary.
In 1995, the father was driving with all 3 children in his vehicle. There
was an accident. He and one child were killed. The other 2 children were
badly hurt but survived.
As a result of his death, the common law wife was to receive benefits
of $118,000 from the car insurance policy and $300,000 from the new life
insurance policy. The mother, who had custody of the 2 surviving children
and who was owed over $60,000 in unpaid child support and interest, was
to receive nothing. Thus, on her behalf and on behalf of the 2 children,
she sued the 2 insurance companies, the common law wife, and the estate
for the child support arrears and the proceeds of the policy described
in the separation agreement. Over a year later, a judge ruled in her favor.
The arrears were ordered to be paid from the 2 polices. The policies were
charged with $150,000 to provide for the surviving children's support,
the amount they would have received if their father had livid up to the
terms of the separation agreement. The designation of his common law spouse
as beneficiary did not protect the proceeds from claim, as some might
expect.
There are lessons to be learned from this case.
1. Even though you have designated a beneficiary on an insurance policy,
those proceeds are liable to be used to provide support for a child or
other dependent if you have made inadequate provision for them on your
death.
2. Read your separation agreement and make sure that you do what you have
promised to do regarding placing and/or maintaining life insurance. If
you go into a new relationship, do not automatically make your new partner
the beneficiary of your policies and plans, without considering your legal
obligations to your former family.
3. If you have separated and are not bound to designate the beneficiary
to be your ex-spouse, consider changing the beneficiary and making a Will.
Unless legally obliged, most people do not want their ex-spouse to be
beneficiary. Separation or divorce does not automatically remove the spouse
if he or she is the designated beneficiary. Most people prefer to have
their children or other family member benefit but forget to change the
designation.
4. Generally, an underage child should not be named directly as beneficiary
of a life insurance policy. If the child is under 18 years when the death
occurs, the proceeds are paid into court to be held until the child turns
18 when the child receives the funds. Or someone must apply on the child’s
behalf. Better to name your Estate
as beneficiary and make a Will setting up the appropriate trust for the
child.
5. In this case, a year had passed and neither the children nor the common
law wife had benefited from the policies in place. Get proper legal advice
to make sure that you meet your obligations and avoid having your estate
tied up by legal proceedings that keep insurance proceeds out of the hands
of your chosen beneficiaries.
The information in this article is general and should not be relied upon
as a substitute for professional advice in specific situations.
Suzanne Michaud is a lawyer with the Mississauga firm of Pallet Valo,
working with clients and their other advisors in areas of estate planning
and administration. (905) 273-3300
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