Alimony and Life Insurance
When the court awards alimony in a divorce or civil union action, it must be secured in the event of the untimely death of the party ordered to pay alimony. In some fashion, the total amount of all alimony due must be secured. Life insurance is a cost effective way of assuring payment of all of the alimony ordered in the event of the death of the payor.
The amount of alimony ordered is at the discretion of the court, but the length of time for which it is ordered is a matter of statute. Except in very rare circumstances, there is no longer permanent, or lifetime, alimony. Instead, when alimony is appropriate, the rule of thumb is that alimony will be paid for the length of the marriage, called durational alimony. That said, at the point of retirement of the party paying alimony, their income generally decreases and alimony, when awarded, should be reduced accordingly. Alternatively, at or near the point of retirement, an action can be brought for the purpose of requesting that reduction of alimony.Calculating the Amount of Insurance Needed to Secure all Alimony due
Because alimony is a specified payment for a specified period of time, the total amount of alimony due under the court’s order can be fully calculated. In making that calculation, remember that alimony is taxable income to the party paid. Therefore, the total amount of alimony due under the order that needs to be secured should be reduced by the tax that would be paid by the payee against that alimony on their tax return. All that needs to be secured by life insurance is the after tax amount, being that amount by which the payee derives from the total payment, not the total payment amount.
By way of example, if there is a 15 year marriage, and alimony is ordered for the duration of the marriage at the amount of $1600 a month for ten years, until retirement ($1600 x 12 months x 10 years= $192,000), and $400 per month for the five years after retirement ($400 x 12 months x 5 years=$24,000), the total pre-tax alimony will be $216,000. After reduction of the $216,000 by the taxes that the payee would be required to pay against that amount, the result of that calculation is the amount of alimony that will have to be secured by life insurance.Reduction of Alimony and Reduction of Life Insurance
The circumstances under which the life insurance amount can be reduced or ended:
- Loss of employment for more than three months allows a court action to reduce alimony, if ordered by the court
- Retirement, if proper time of retirement is not determined in the initial order for alimony, a court action is required to determine if reduction is proper and, if so, to grant the reduction
- Marriage, a new civil union or cohabitation of the payee, cohabitation now having a broader definition, terminates alimony and, thus, the need to secure it
- Death of payee
- Reduction of security needed because of payment requiring security, where appropriate
This will depend on the specific desires of the parties. The Payee can own the policy to assure premiums are made and the policy remains in effect as ordered, but this can act to prevent the payor from reducing the policy amount as alimony is paid, or can prevent two beneficiaries to a plan in a higher amount than ordered for alimony security.
If you need to discuss securing alimony, reducing security needed for alimony or reducing alimony in NJ, call the Law Offices of Peter Van Aulen for a free comprehensive in office consultation at 201-845-7400.