Life Insurance, Separation Agreements, and Future Support for Children

Suppose that you are recently separated or divorced and have minor children. Should you have a life insurance policy in place to ensure sufficient resources are available to provide for your children if you suddenly die? What factors must you consider before taking out a life insurance policy to benefit your children? Should you enter into any agreement with your former spouse to carry this insurance? The answer to all of these questions is probably no.

North Carolina judges do not have the statutory authority to order a parent to carry a life insurance policy to benefit a minor child. How do former spouses require one or both parents to carry insurance for the benefit of the minor children in the event of a parent’s untimely death? The parties can enter a settlement agreement allowing each party to agree to items that a judge does not have an opportunity to impose.

What items should you consider before entering an agreement that could bind you to years of expenses? As the parties enter into a binding contract enforceable by the court, each party should have any settlement documents reviewed by an experienced family law attorney before signing anything.

If having a contingency plan for support is right for your situation, determining the policy value and beneficiaries is important. Will the policy be for a set amount until the children turn 18, or should there be a declining value as the children age? Do you intend to have the policy in place to cover college expenses? As the legal obligation to support a child ends when the child reaches 18, under North Carolina General Statute § 50-13.8, one parent may not wish to continue an expensive policy for college costs. For more information on separation agreements and college expenses, read our blog here.

After determining that you are willing to carry the insurance policy, the next decision is whether to make the other parent the beneficiary as trustee for the minor children. For some parents, designating a former spouse as the beneficiary is troubling. Designating an alternative or co-trustee may offer some piece of mind ensuring the monies benefit the children. Having the other parent as a beneficiary could subject the benefits to that parent’s creditors, or the other parent could keep the money for themselves. Listing a minor child as a beneficiary could cause problems that you should address with the insurance agent.

To determine the insurance needed, you will need to calculate the children’s needs and expenses through age 18. Over and above the support obligation, are there health or medical needs for the children? Do the children attend private school? Are the children involved in extracurricular activities? Based on these and other conditions specific to your children, you may consider including a provision in the separation agreement to reduce the amount of insurance as the children get older.

After reading the information above, parents should realize that they can take out life insurance policies on themselves for their minor children’s future support without entering into any agreement with a former spouse. The policy can designate the other parent or a third party to manage the funds through a trust, with one or more trustees keeping an eye on the spending of funds. Carrying an insurance policy for future support and financial security of a minor child does not require a separation agreement. It could potentially open you up to future court proceedings if, for some reason, the policyholder must cancel the policy.