The life insurance provisions in a separation agreement are not often in great dispute. I have not found any reported or unreported cases in which life insurance has been contested. However, life insurance is still an important aspect of separation agreements that should not be dealt with lightly. The consequences of not having a proper life insurance clause could be devastating to both the survivors and the estate of a deceased parent.
The introduction in 1995 of two products – Divorcemate’s computer programme “Lifemate” and The Family Law Insurance Centre’s “Familysure 2000” should encourage Family Law lawyers to take more interest in the life insurance issue. In this paper those two products will be examined as well as all aspects of the life insurance clause in a separation agreement.
The Obligation To Have Insurance
Section 34 (1)(i) of The Family Law Act allows a court to make an interim or final order “requiring that a spouse who has a policy of life insurance as defined by the Insurance Act designate the other spouse or a child as the beneficiary irrevocably”. The Insurance Act has a broad definition for life insurance which would include the death benefit from an employer.
Some lawyers have argued that if there is no insurance in place at the time a court deals with the matter then the court can not force a person to obtain insurance because the wording of section 34(1)(i) specifically states “has a policy of life insurance”. However, section 34(1)(k) empowers a court to make an order “requiring the securing of payment under the order, by a charge on property or otherwise”. I would submit that ordering a payor spouse to obtain life insurance so to secure that support payments will always be made would fall under section 34(1)(k). I have found no reported or unreported written decisions on the issue. However, I was involved in a case in which the Court of Appeal ordered that the husband obtain $120,000.00 of life insurance to secure the support payments. The trial judge had ordered the husband to keep in place the insurance he had which was only about $30,000.00. The insurance premiums were quite expensive because of the husband’s age so the court ordered that the wife was to pay one third of the total premium of $3,200.00. The case is Nesbitt v. Nesbitt Court of Appeal Docket 380/86. The Divorce Act does not specifically discuss insurance but section 15(2) does allow a court to order security for support payments.
The Obligation Of The Custodial Spouse To Have Insurance
Many lawyers now insist that the custodial parent also have insurance. If the custodial parent dies the non-custodial parent will usually obtain custody. The surviving parent would be entitled to obtain support from the deceased custodial parent’s estate pursuant to the dependant’s relief provisions of the Succession Law Reform Act if no provisions were made. It could be argued that the court cannot make the custodial parent provide insurance because there is no support order to secure. However, I believe the FLA’s section 33 would allow a court to rationalize such an order because it is securing a possible future support payment.
How Much Insurance
I have not been able to find any reported or unreported cases on the issue of how to calculate the amount of insurance that should be ordered on separation. The reported and unreported decisions that even mention insurance simply order that insurance that is already in place be continued. There is no discussion as to what amount is an appropriate amount. That finding fits with my experience, whether it is a matter between lawyers or judges, the insurance issue is negotiated or ordered as follows: “How much has your client got?” “Sounds okay”.
Fortunately, with the advent of Divorcemate’s “Lifemate” the quantum of insurance that should be ordered has become more of an exact science. Lifemate will actuarially calculate the amount of insurance needed based upon a number of factors. Those factors are: 1) the age of the child or spouse; 2) the amount of support; 3) the duration of the support; 4) the interest rate. Lifemate will then calculate what amount of life insurance, if invested at the payor’s death, will provide for the same support as was being paid at the time of death, including a cost-of-living provision. As the amount of insurance needed decreases every year as the duration factor is reduced the programme will also provide the amount needed in five year intervals. I would hope that Lifemate will have the option of showing one year intervals for those who only want the minimum amount of insurance in place.
Lifemate assumes, as do most lawyers, (though the FLA and cases do not discuss it) that the purpose of insurance is to generally secure the support payments. I believe that the arguments that there should be insurance, even when there is no support or when a surviving spouse wants a bonus on the death of the other spouse are not valid. Using insurance to secure an equalization of assets such as a pension that is being divided on an “if and when basis” is another use of life insurance. I do not intend to discuss that special use of insurance in this paper.
The tax issue has not yet been specifically dealt with by Lifemate. Upon death, when the money is invested the interest portion will be taxable but the capital will not be. Therefore, if the support is taxable the amount needed is less than Lifemate calculates. When the non-taxable child support world arrives, which will be upon us soon, the amount calculated is not enough. My understanding from my actuary is that the gross up from the non-taxable support should be 50% of the marginal tax rate. If the beneficiary, however, is the child or child in trust there may be no tax consequences as the child will probably not have taxable income.
Lifemate does not address the issue of extra costs above the support payments such as the usual provisions for health and educational costs. Those costs may be substantial in the future. A solution might be to add to the required amount of insurance the present value of future university costs contributions.
Another consideration is that upon the death of one parent, the costs of the child will increase for the surviving spouse. Monies spent by the deceased parent when exercising access such as food, entertainment, vacation and gifts will be now be paid by the custodial parent. However, a simple reason to leave this factor out of the equation is to argue that the Canada Pension Orphan’s benefit which is presently in the $140.00 a month range might cover those costs.
Another consideration is that a spouse who has a pension plan that provides an allowance for dependant children (such as the Federal Government’s) could argue that the amount of insurance needed should be reduced. This amount can be substantial and actually increases every year as the employment pension increases. Though this amount is lost if the payor loses his employment, the same is true if the insurance is the payor’s death benefit from employment. In Ottawa using the death benefit as the only insurance is quite common.
Duration of Insurance
As the purpose of insurance is to secure support, the insurance should terminate when the support obligation does. Generally life insurance clauses in agreements state the recipient spouse will then sign a release. One precedent I received had that release signed with the agreement and held in escrow by one of the solicitors until the obligation to have insurance ceases. I do not believe this practice is necessary. If there is going to be an argument as to when the obligation ceases then neither solicitor is going to be able to deliver the release.
The agreement should state that upon the death of the payor that support will continue to be paid by the estate until the insurance is received by the beneficiary.
Who Should Be Named As The Beneficiary
The FLA’s section 34(1)(i) states that the spouse or the child can be named the beneficiary of the life insurance policy. However, most agreements and court orders name, in the case of child support, the spouse in trust for the child. There are a number of good reasons to do so. If the child is named directly as beneficiary and the payor dies before the child is 18 years of age, then the insurance proceeds are held by the Public Guardian and Trustee. The custodial parent has to deal with the Public Guardian and Trustee to request money. The Public Guardian and Trustee may not remit to the custodial parent any of that money, if the Public Guardian and Trustee believes that the custodial parent can do without the money. I had such an experience with the Public Trustee. Another problem with naming the child as beneficiary is that at 18 years of age the child, whether mature or not, obtains the insurance money.
Some lawyers insist that in the case of child support, the custodial parent be named as beneficiary. This technically is appropriate for the same reason that child support is payable to the parent and not the child. If the amount of life insurance is always updated to be the exact amount needed to replace support then a non-custodial spouse could not argue against such an arrangement. However, when the insurance is in trust for the child, the tax of the interest is taxable at the child’s lower rate ( probably a zero rate) rather than the custodial parent’s rate, making it more advantageous to have the insurance payable to the spouse in trust for the child.
If the amount of insurance is not always updated, having the spouse as beneficiary will result in the spouse obtaining the extra insurance not needed for the support of the child.
Clients will often want another person other than their spouse to be the trustee. Unless the parties agree to mutually name someone else, the custodial parent can insist that he or she be named as the trustee. To allow a request for another party to be trustee, would be the same as ordering someone else to receive support payments. I was unsuccessful in an arbitration before Professor Payne, when I argued that my client’s fear that his wife would have him killed for the insurance money, (she had ridden with a motorcycle gang) was a reason to name another trustee.
The Terms Of The Trust
Though most agreements will state that the insurance funds are held in trust, few agreements set out the terms of that trust. If no terms are stated, then the child will be entitled to receive the money at the age of eighteen. Probably neither parent would want the child to obtain the insurance at age eighteen. Most parents make wills in which the age the children get their legacy outright is much older than eighteen. Some agreements will state that the age at which the child obtains any unused insurance, would be the age the child no longer qualifies for support. However, Sidney Goldstein, a tax and estate planning lawyer advises against such a termination date. That date could still be debatable and it could have the effect of encouraging a child to quit school prematurely so to obtain the monies still held in trust. Stating the last possible age, such as twenty two is probably a better idea. So not to offend the rule in Saunders v. Vautier resulting in the child being able to demand the money at eighteen, the trust should also stipulate what occurs if the child dies before becoming of age. Mr. Goldstein also suggests that there may be circumstances where a more sophisticated trust clause would be necessary in a separation agreement. It would resemble a full trust agreement involving clauses to deal with such matters as alternate trustees and trustee powers. If a person other than one of the parents is the trustee, it would be advantageous to have that third party sign a trust agreement.
Varying the Amounts of Insurance
The non-custodial parent will often agree in the first instance to have all of his or her insurance go to the children. However, if the insured later has another family or becomes alienated from the children he or she might want to reduce the amount of insurance. This is especially true if the insured becomes uninsurable or the premiums become very high. The required amount of insurance may have declined as the children get older so the insurance can be reduced. However, if there is no material change clause in the separation agreement and there is no court order dealing with insurance, then there is no mechanism to change the insurance. All agreements should therefore have their material change of circumstances clauses cover insurance as well as support and custody. This variation could be provided for in the insurance clause or like the other variations, it can be put in the material change in circumstances clause. I believe the former would be clearer. The clause could also state how the quantumof insurance should be determined to reduce arguments.
An alternative to leaving it to a variation application is to state in the initial agreement that the amount of insurance required reduces by a set amount at set periods. Lifemate calculates the reduced amount of insurance needed on a five year basis.
As the insured gets older or has to reapply for insurance, the premiums may become quite expensive. The insurance provisions clauses in Canada Law Book’s “Preparation of Domestic Contracts” states that if the insured’s insurance premiums are increased because of injury, sickness or age over sixty-five, to an amount that is 10% or more above the rate of a healthy person of the same age, or (when the insured is sixty-five) a healthy person of sixty-five, then the insured need only acquire such insurance as can be purchased in the amount stipulated in the agreement by a healthy person of his or her age or sixty-five, as the case may be. Though that clause might reduce arguments, I would still suggest the matter be reviewed when the premiums are increased as the payor might still have the ability to pay the premiums and the need for insurance might still exist. The right to a review of the insurance obligation if premiums increase should be stipulated in the agreement.
Many spouses have insurance only through their employment by way of a death benefit. Upon separation they often will not want to buy further coverage and argue they cannot afford to buy extra insurance. A problem arises if a spouse should lose his or her job and therefore no longer has the death benefit. The agreement should therefore require that alternate insurance be put in place prior the death benefit coming to an end. As the cost of such insurance may be prohibitive or not available because the person is now uninsurable, the agreement should state that reasonable steps will be taken at a reasonable cost. Perhaps the payee spouse might even have to pay for part of the insurance costs.
At the time of signing the agreement, or soon after, one can easily check that the proper amount and the proper designation are in place though I am sure few clients do actually follow up. It is important to make sure that the insurance is not cancelled or the designation changed. Most agreements require the insured to provide proof on an annual basis that all is in order. I would suggest that a simpler method would be to allow the beneficiary to inquire of the insurer directly as to status at any time and to direct the insurance company to notify the beneficiary of any default in payment. That direction to the insurance company from the insured can be a schedule to the agreement.
Another method of verifying compliance, would be to have the beneficiary named as the owner of the life insurance policy and the one paying the premiums. The cost of those premiums could be added to the support payments. They would be grossed up if subject to tax. This would not be possible if the insurance is a party’s employment death benefit.
Default In Payment Of Insurance Premiums
Most agreements will provide that if the insured defaults on payment of premiums, the beneficiary may pay the premiums and collect those payments as well as costs from the insured. It is also advisable to add that those payments and costs are to be deemed lump sum support payments. This will make the collection easier as it can be processed through the Family Support Plan and is not erased by bankruptcy.
The Family Law Insurance Centre of Etobicoke, Ontario has launched a useful and interesting product called “Familysure 2000”. It is specifically designed for separating spouses to ensure that the appropriate amount of insurance is obtained to replace support payments in the case of the death of the payor spouse. Extensive work has gone into the formulation, production and marketing of this product. Lawyers should definitely read their promotional material and talk to the company. Do not rely only upon my basic overview.
Family Sure 2000 is insurance that provides that the present support, with an optional cost of living allowance increase, will be paid until a specified age. Rather than receiving a lump sum payment the beneficiary receives a stream of support payments. The premiums are based, like any insurance product, on the age of the insured, the amount of the payments (the monthly support payments), and the number of the payments. Like other life insurance products the cost is also adjusted if the insured is a smoker.
One can request a quote directly from the Family Law Insurance Centre or in the comfort of one’s own computer one can obtain a free computer programme that will easily produce what the premiums will be for a specific support payment. The cost should be less than straight term insurance because the coverage is really declining term for a limited term. The Family Law Insurance Centre suggests the owner of the policy be the recipient and that the cost be added to the support payment to take advantage of any tax break (while we still can until 1997). I believe the beneficiary should still be the spouse in trust because of the tax advantage of having the interest taxed as the child’s income.
The guess work of how much insurance is needed has been removed. There would be no issue as to a surplus amount or varying the amount. There is no worry of insurance being terminated when employment is terminated. Having the recipient as the owner and the payor of the policy solves the security problem and ongoing investigations as to the status of the policy (though as discussed having the recipient as the owner of a regular life insurance policy is also always possible). The cost should be less than straight term insurance.
The main drawback would be that if the parties already have insurance they may not want to go to the extra expense. The tax issue has not been adequately addressed because if the spouse is named the beneficiary then the interest part of the payment is taxable. If the present taxable amount of support is used in the calculation then the taxes would be less than now paid on the total support payment. However if the support amount is on a non tax basis which is coming next year for child support then the amount needed would have to be grossed up. There is also the issue of higher expenses with no non custodial parent paying for some expenses as well as the university costs. In response to my inquiry The Family Law Insurance Centre stated a university education rider is under development. It is hard comparing value for one’s dollar, as the actual capital amount of insurance is not disclosed. My insurance agent stated that some straight term insurance can actually be less expensive to purchase than declining term insurance because of the small size of the declining term insurance market.
A sample printout from the Family Law Insurance Centre is a schedule to this article. The free computer disk provided by the company to calculate quotes also contains information about the company.
The Succession Law Reform Act
If there was a miscalculation (or no calculation) and the amount of insurance is not adequate, the dependant spouse or child still has the opportunity to make a claim against the estate of the deceased parent or spouse. Part V of the Succession Law Reform Act sets out the rights of dependants who were not adequately provided for. Section 63(4) specifically states that “An order under this section may be made despite any agreement or waiver to the contrary”. However, there has to be assets of the estate to be able to collect. Fortunately, for a dependant’s claim the definition of estate is extended to include such assets as jointly owned property and insurance policies owned by the deceased.
The Separation Agreement Clause Life Insurance
X.1 The wife must maintain, at her cost, term life insurance in the amount of $______ per child. This insurance shall be unencumbered and in force while she is obliged to pay child support. The husband in trust for the children will be the irrevocable beneficiary of such insurance. When the child support is terminated the wife’s obligation to have the insurance is also terminated. The husband will, upon termination of the wife’s obligation, provide the insurance company with a direction that the irrevocable designation can be withdrawn.
X.2 The wife shall provide to the husband at least annually proof that she has complied and is complying with paragraph X.1 above, and shall immediately notify in writing, with a copy to the husband, the insurers that it is to give written notice to the husband at such address as he may advise of any discontinuance or default in maintaining the insurance or plan. The wife shall also sign the direction set out in Schedule “A” of this agreement to allow the husband to confirm directly from the insurer that the insurance is in full force and effect.
X.3 If the husband receives notice of default, she may, if the policy or plan allows, pay the amount necessary to keep the policy in good standing after giving the wife forty-eight hours written notice of his intent to do so within which time the wife shall provide the wife good reason why he should not make such payment. If the wife fails to provide good reason and the husband pays the amount, it shall be deemed owing by the wife to the husband and be enforceable as lump sum support.
X.4 If the wife dies having failed to maintain the said amount of insurance required above and in addition to any other remedies there may be against the wife’s estate, the estate shall pay the required amount and until it does there shall be a lien and first charge against the estate in the amount that would have been paid from the insurance policies had the party maintained the amount of insurance required.
X.5 In addition to any other remedy the husband may have against the estate of the wife if the insurance proceeds are not paid because of default by the wife, the wife shall be entitled to make application pursuant to the Succession Law Reform Act or successor legislation thereto, on behalf of the child as a dependent.
X.6 Until the payment of insurance proceeds owing pursuant hereto is made, the support payments owing pursuant to paragraph X, (presuming the wife were alive), shall continue.
X.7 If the policy of insurance is no longer available to the wife through her employment she will, to the best of her abilities, obtain a replacement insurance, ensuring there is no gap in coverage beyond his control. She will give the husband ample notice that she is no longer entitled to insurance from employment so that alternate arrangements can be made.
X.8 The husband will maintain at his costs term life insurance in the amount of $______ per child. The husband in trust for the child will be the beneficiary of such insurance. The same rules in these paragraphs that apply to the husband’s insurance also apply to the wife’s insurance.
X.8 The trust terms upon which the trustee holds the insurance proceeds paid pursuant to this agreement are as follows:
(a) until the age of twenty three the income from the proceeds of insurance must be used in the trustee’s sole discretion for the welfare of the child. Any income not used in a year must be added back to the capital and treated as part of it. The trustee may encroach on the capital if necessary in the amount and as frequently and for whatever purposes she may determine in her absolute discretion;
(b) whatever is left of the proceeds of insurance when the child becomes 23 must be paid to that child at age 23 provided if the child is then deceased provided if there are no children the amount remaining shall be paid to the siblings of the deceased child or their insurance trusts created by this agreement or if there are none the amount remaining shall be paid to the deceased husband’s estate.
X.9.1 As the purpose of the insurance is to replace the support obligation and not to provide a windfall if the insured dies. The husband may request that the amount of life insurance required be lowered, no more than once every X years, on the basis that the amount required has been lowered by the passage of time or other relevant factors. The following factors shall be taken into account:
(a) the amount of total support obligated to be paid, pursuant to this agreement, an amending agreement or court order;
(b) the number of years left of the support obligation;
(c) the benefits the child would receive on the insured’s death from the insured’s employer.
X.9.2 The husband may request that the amount of life insurance required be lowered or the cost of the premiums be shared if the cost of the premiums are materially increased.
X.9.3 The Dispute Resolution procedure set out in this agreement shall be used if there is a claim to reduce the amount of insurance or a claim to share the cost of the premium. Failing a resolution of the claim the husband is entitled to bring a variation application on the grounds that there has been a material change in circumstances.
I have attempted to set out the many issues that the life insurance clause must consider. I have given you my opinions and in some cases the opinions of other lawyers. I do not expect that all my opinions, nor my life insurance clause will be accepted by lawyers but they are food for thought. I would expect that with the introduction Lifemate and Familysure 2000 life insurance will be a more discussed issue.
When asked to write this paper I wrote eighteen law firms asking them to provide their standard insurance clause. Included were all the larger firms. Follow up letters and phone calls were made. I would like thank the following law firms for having the courtesy to reply and helping with this paper: Cooligan, Ryan; Hamilton/Appotive; Glen Kealey; MacKinnon & Phillips; and Jon Snipper. I would also like to thank my mother-in-law Anita Dubinsky for correcting some of my grammar and Jon Snipper for his legal and stylistic comments. As I did not always agree with him he can not be held responsible for the final version of this paper.
S C H E D U L E “A”
FROM: Name of Spouse
TO: Life Insurance Company
I hereby direct that my spouse, _________, in trust for my child, _________, is to be the irrevocable beneficiary of $___________ dollars of my insurance with your company.
I hereby direct that my spouse, ___________, in trust for my child, __________, is to be the irrevocable beneficiary of $__________ dollars of my insurance with your company.
I hereby direct you to advise my spouse of any discontinuance of this insurance on account of default of payment or any other reason.
I hereby direct you to give my spouse any information requested concerning my life insurance policies.
I hereby direct you to advise my spouse that you have received this direction and will comply with it.