Child Support And Life Insurance: Can Benefits Be Intercepted?

Divorce can be a messy affair, and when children are involved, it's crucial to ensure their financial security. This is where child support and life insurance come into play. Child support payments help maintain the children's standard of living, but what happens if the paying parent dies? This is where life insurance comes in, providing a financial safety net to ensure the children's needs are still met. However, it's not always straightforward, and questions arise, such as Can child support intercept a life insurance benefit?

Naming the child as the beneficiary

Naming your child as the beneficiary of your life insurance policy is an option, but it is not recommended. This is because minors cannot be paid the death benefit directly, and the payout will be delayed.

If you name your minor child as the beneficiary of your life insurance policy, a court will have to appoint an adult custodian who will be responsible for managing the funds from the payout. This process can take several months, during which time your child will not be able to access the financial support you intended for them. The custodian will be able to use the money for state-approved expenses, like education, and your child will be able to access the funds when they reach the age of majority (typically 18 or 21, depending on the state).

If you want your life insurance payout to go to your minor child, it is better to set up a trust for them so they can receive the benefit promptly and without having to pay taxes or legal fees. You can also name a custodian to help your child claim and manage the death benefit until they turn 18. Alternatively, you can name your spouse as the primary beneficiary and your trust as the contingent beneficiary.

Naming a custodian as the beneficiary

The Uniform Transfers to Minors Act (UTMA) allows for proceeds to be left to a minor and maintained by a custodian until the child reaches the age of majority, which is 18 in most states but can be as high as 21. A custodian can make withdrawals from the assets for the benefit of the minor, such as for tuition, educational expenses, or medical expenses. They can also manage the overall custodial account in the best interest of the minor, purchase stocks, mutual funds, or other investment securities on their behalf, and are required to turn over any remaining assets to the child once they reach the age of majority.

It is important to note that even if there is a surviving parent, they do not automatically become the custodian for the purposes of your life insurance policy, even if they are named as the guardian of that child in a will. Therefore, choosing a custodian is a big responsibility and should be given careful consideration. Some key questions to ask yourself when selecting a custodian include:

• Is this person knowledgeable about finances?
• Will they be comfortable providing investment advice and handling financial or investment decisions on behalf of your child?
• Does this person have the time to handle the responsibility fully?
• Does your chosen custodian want the responsibility?

While it may be a difficult decision, it is important to remember that failing to name a custodian could have serious consequences. If a minor child is named as a beneficiary without a custodian, they may not be able to access those assets until they reach the age of majority, which is likely the opposite of what you intended when purchasing insurance. Additionally, a probate court may appoint a guardian for your child, which can be time-consuming and expensive, leaving a critical decision up to the courts.

Therefore, it is always recommended to consult with a financial advisor or estate planning attorney to ensure that you are making the best decision for your unique circumstances.

Designating the ex-spouse as the beneficiary

Designating your ex-spouse as the beneficiary of your life insurance policy is a complex issue that depends on several factors, including the type of policy, the state where the policy was issued and where the couple lived, and the specific terms of the divorce decree. Here are some key considerations to keep in mind:

• State Laws: Many states have enacted laws that automatically revoke the ex-spouse as the beneficiary of a life insurance policy following a divorce. These laws are designed to prevent conflicts among families and limit litigation over disputed policies. However, it's important to note that these laws don't guarantee that your particular claim will fall under them, and there may be exceptions, such as when there is an agreement between former spouses to maintain the beneficiary designation.
• Federal Laws: Certain federal laws governing life insurance policies, such as those pertaining to military service members (SGLI) or federal employees (FEGLI), can supersede state laws and divorce decrees. In these cases, the named beneficiary on the policy will receive the benefit, even if it conflicts with a divorce decree.
• ERISA Policies: Most employer-provided life insurance plans fall under the Employee Retirement Income Security Act (ERISA). If a divorce decree meets the requirements for a Qualified Domestic Relations Order (QDRO) under ERISA, the life insurance proceeds will go to the person named in the divorce decree, not the named beneficiary. ERISA provides greater protection for spouses and dependents after a divorce, allowing for exceptions to the general preemption rule for QDROs.
• Irrevocable Beneficiaries: Some life insurance policies have irrevocable beneficiaries, which means the policyholder cannot change the beneficiary without the consent of the named beneficiary. In these cases, the ex-spouse would remain the beneficiary and be entitled to the payout upon the policyholder's death, even after a divorce.
• Minor Children: If there are underage children involved, it may be appropriate to keep your ex-spouse as the beneficiary on your life insurance policy to ensure their financial protection. This is especially relevant if you are ordered to pay spousal and/or child support, as the judge may require you to maintain life insurance to secure these payments.
• Divorce Decree: The specific terms of your divorce decree can impact the beneficiary designation. In some cases, a divorce decree can override a named beneficiary if it is not preempted by laws controlling the life insurance policy. Consult with a lawyer to ensure your divorce decree adequately addresses life insurance policies and beneficiary designations.
• Updating Beneficiaries: Remember to update your beneficiaries after a divorce, especially if you do not want your ex-spouse to remain as the beneficiary. Contact your insurance company and follow their procedure for changing beneficiaries. This is a crucial step to ensure your wishes are carried out.

Child support enforcement and collection measures

Each state has agencies known as "Title IV-D" agencies, which are required by federal law to provide child support enforcement services to anyone who requests them. These agencies can help custodial parents establish court orders for support, as well as collect support payments and enforce court orders. They can also assist in establishing paternity and obtaining child support orders. In some states, such as Florida, the Department of Revenue administers the Child Support Enforcement Program, which performs similar functions.

To enforce and collect child support payments, various tools and methods are employed. These include:

• Wage withholding: Child support payments can be withheld from the non-custodial parent's wages, with the payment sent directly to the custodial parent through an earnings withholding order.
• Tax refund interception: Federal and state tax refunds can be intercepted to pay for child support arrears.
• Credit bureau reporting: Parents owing past-due support can be reported to credit bureaus, impacting their creditworthiness.
• Employer notification: Employers of parents owing child support can be notified, and payments can be withheld from their wages.
• Driver's license suspension: Non-compliance with child support orders can result in the suspension of the non-custodial parent's driver's license.
• Lottery winnings interception: In some states, lottery winnings can be intercepted to pay for child support arrears.
• Account garnishment: Financial accounts at institutions can be garnished to collect past-due support.
• License revocation: Professional or recreational licenses can be revoked or suspended for non-payment of child support.
• Contempt of court: If a person willfully disobeys a lawful child support order, they can be found in contempt of court and face additional penalties.
• Property liens: Administrative liens can be placed on real or personal property, and assets can be seized to cover past-due support.
• Passport restrictions: The issuance or renewal of a passport can be denied for parents who owe child support.
• Federal prosecution: In cases where non-custodial parents move to another state to avoid paying child support, federal prosecution can be pursued.

To facilitate the enforcement and collection process, states like Texas have implemented the Insurance Reporting and Intercept Program. This program requires insurers to match the names of claimants with obligors/claimants who owe past-due child support. When a match is found, the insurer receives a notice of a child support lien or an income withholding order to secure payment. Similar regulations are in place in Massachusetts, where insurance payments with child support liens are identified and intercepted to satisfy the liens.

Life insurance and divorce

Life insurance is an important aspect of divorce proceedings, especially when children are involved. Here are some key considerations regarding life insurance and divorce:

Beneficiary Updates

In most cases, married individuals list their spouse as the primary beneficiary of their life insurance policy. During a divorce, it is essential to update the beneficiaries to reflect the change in marital status. Most life insurance policies are revocable, meaning the policy owner can change the beneficiary at any time. Contacting the life insurance agent can help verify if the policy is revocable and facilitate the redesignation process.

Cash Value Considerations

Whole life and universal life insurance policies accumulate cash value over time. This cash value represents part of the couple's net worth and should be accounted for during the division of marital assets. In a divorce where assets are divided evenly, each spouse would typically receive half of the cash value from the policy.

Protecting Alimony and Child Support

Life insurance can play a crucial role in protecting alimony and child support payments. The spouse with primary custody of the children should consider maintaining a life insurance policy on their ex-spouse with a benefit amount sufficient to replace child support or alimony until the children are financially independent. This ensures financial stability for the children and the custodial parent in the unfortunate event of the non-custodial parent's death.

Premium Payments

Deciding who will pay the life insurance premiums after a divorce is crucial. If the spouse responsible for making payments is unreliable, it may be wise to have this payment responsibility written into the divorce agreement or include the other spouse on the policy record to receive duplicate billing and lapse notices. Failure to pay premiums may result in the cancellation of the policy.

Custody and Support

If one spouse has primary custody of the children and is receiving alimony or child support, maintaining a life insurance policy on the other spouse can provide financial protection. In some cases, courts may even order individuals without existing coverage to purchase a new life insurance policy as part of the divorce settlement. This ensures that the ex-spouse and minor children are financially protected if the higher-earning spouse passes away.

Overall, life insurance is a vital aspect of divorce proceedings, especially when there are children and financial support obligations involved. It is important to consult with legal and financial professionals to navigate these complex matters effectively.

Frequently asked questions