In a separation one of the issues spouses need to address is whether or not they will maintain their insurance policies and who will be named as the beneficiaries.
If one spouse has an ongoing obligation to pay child maintenance or spousal maintenance it is common for that spouse to “secure” those payments by designating the other spouse as the beneficiary of the life insurance in the event they die prematurely for so long as child maintenance and/or spousal maintenance is payable.
What seems a simple idea is turning out to be a complex legal issue. For example, what happens if there is a $500,000 insurance policy and the policy holder dies only days before his or her obligation to pay child maintenance or spousal maintenance would have ended? Can the former spouse retain the $500,000? There is a recent court decision that says no, the spouse can only retain sufficient funds to cover their actual claim.
In another case in Ontario the husband had a $250,000 life insurance policy. He signed a separation agreement that said his ex-wife would pay the premiums and he would maintain her as the beneficiary. During his lifetime however he changed the beneficiary to his new wife and did not tell his former wife who kept paying the premiums. On his death the insurance company paid the death benefit to the new wife. The former wife took the case to the Supreme Court of Canada who ultimately awarded her the $250,000 because the husband did not uphold the contract he had made with her when he changed the beneficiary.
In order to address the first situation we often add a clause in a separation agreement that the amount of life insurance to secure maintenance payments reduces annually and we set out the amounts required. Alternatively we set up an insurance trust and authorize the trustee to pay child maintenance and/or spousal maintenance from the trust. Any remaining funds go to the children. This is a good idea but it is more expensive to set up the trust and to administer it.
To address the second situation where a beneficiary was changed, a separation agreement can contain a clause which allows the payor of the premiums to contact the insurer whenever they wish to ensure no changes have been made to the policy. An even better way is to require one spouse to name the other spouse as the “irrevocable beneficiary” and then the policy cannot be changed without the other spouse’s consent.
Deborah A. Todd
