Life Insurance in a Divorce Setting

In many — if not most — matrimonial actions, counsel or the court almost always automatically ensure that the dependent spouse is provided with life insurance, despite the fact that the statute authorizing life insurance to secure alimony is permissive and not mandatory. In many cases where there is a child support obligation or an equitable distribution obligation, the purpose of life insurance is clear: to secure these obligations, in the event the paying spouse dies prior to their fulfillment. Life insurance protects the supported spouse by providing a source of funds to assist with the support of the children (an obligation that survives the death of the spouse) and by assuring that the payment of equitable distribution is received (because the payment should not depend on the life or death of the obligor).

In a situation, however, where child support and/or equitable distribution are not issues, the question arises as to whether or not life insurance is an appropriate security measure for the payment of alimony. Let's look at the following hypothetical. Assume the following facts in a divorce under New Jersey law:

The Husband is 50 years old, the Wife is 48 years old, and their children are emancipated (therefore, child support is not an issue). They have been married 20 years. The parties have entered into a Property Settlement Agreement, which provides for permanent spousal support in the amount of $120,000 per year, payment of equitable distribution to the Wife in the amount of $1 million, and division of retirement accounts on a 50/50 basis, which is approximately an additional $250,000.00 in retirement funds to the Wife. The Wife is to receive her entire equitable distribution (ie, $1 million) at the time of the divorce, which is scheduled to take place immediately upon the signing of the Property Settlement Agreement.

The issue now is whether the Wife is entitled to have life insurance on the life of her soon-to-be ex-husband, where she would be the beneficiary, when there is no child support obligation and equitable distribution has been paid. Despite lawyers' and courts' almost automatic belief in securing alimony obligations, life insurance should not be an automatic entitlement of the dependent spouse.

Statutory and Case Law

The state statute provides for termination of alimony upon the death of the payee. Thus there is nothing to secure because presumably once the payee dies so does his obligation. Furthermore, the statute does not mandate life insurance as security for alimony, but neither is such security prohibited. In other words, while it is not mandatory, it is permissive. Specifically N.J.S.A.2A:34-25 provides:

“Alimony shall terminate upon the death of the payer spouse … Nothing in this act shall be construed to prohibit a court from ordering either spouse to maintain life insurance for the protection of the former spouse or the children of the marriage in the event of payer's death.”

Thus, unlike child support and equitable distribution obligations, which survive the death of the obligor and require security for the due performance of these obligations, the alimony obligation does not survive. The dependent spouse has no right to expect more from the supporting former spouse than the support to which she would be entitled had the parties remained married. Khalaf v. Khalaf, 58 N.J. 63, 67 (1971). If the parties had remained married, and the supporting spouse died, his income stream from employment would have ceased. This is the reasoning used by the courts to determine whether to award alimony.

This reasoning also holds true where the parties did not maintain life insurance during their marriage, and upon the working/paying spouse's death, the dependent spouse would only have the remaining assets and herself to depend upon. By requiring the working spouse, at the time of divorce, to maintain life insurance as security for alimony beyond his lifetime, the divorced spouse actually ends up in a far superior position than she would be if she had remained married. Moreover, her lifestyle is now superior to his, because he is required to incur a cost that was never part of the marital lifestyle.

Given that the statute provides for termination of alimony upon the death of the obligor, the dependent spouse cannot and should not expect from the supporting spouse more than that to which she would be entitled if the parties had remained married.

As stated, the alimony statute specifically does not require the obligor to maintain life insurance as security for alimony. The statutory mandate that alimony terminates upon the death of the paying spouse, coupled with the legislature's refusal to impose the obligation to maintain life insurance as security for alimony payments after the paying spouse's death, leads to the fair and logical conclusion that life insurance is not an automatic entitlement. Thus, provision of life insurance for the purpose of securing alimony should be the exception rather than the rule. The notion that the use of life insurance as security for spousal support is not an automatic right is not only supported by statute, but by the case law analyzing the statute.

NJ Supreme Court Weighs In

The statute dealing with life insurance and the legislative intent in enacting it was analyzed by the New Jersey Supreme Court in Jacobitti v. Jacobitti, 135 N.J. 575 (1994). The Jacobitti case dealt with a wealthy 87-year-old man with assets of over $1.5 million, for whom the cost of obtaining life insurance was prohibitive due to his age. His ex-wife, although 19 years younger than he, was confined to a wheelchair due to the debilitating and deteriorating effects of multiple sclerosis. She received only $79,000 in equitable distribution, making her totally dependent on her ex-husband for support and would, without the assistance of the court, become destitute and a public charge.

In that case the New Jersey Supreme Court stated:

“under the 'unique circumstances of the case,' the trust was the 'appropriate remedy to fulfill the Legislature's intent of authorizing life insurance for the protection of a dependent spouse in the event of the payer's spouse's death.” (emphasis supplied) Based on the facts before it, the court went on to state “this case presents us with classic example of what the Legislature sought to avoid when it enacted the life insurance statute: an ex-spouse who would be penniless but for alimony.”

Thus, the Jacobitti court clearly recognized that the Legislature did not intend life insurance to become an automatic entitlement of the receiving spouse — despite the fact that both lawyers and the judges alike presumed the existence of such an entitlement — but a means of assuring that the dependent spouse would not be destitute and a public charge upon the death of the obligor.

Conclusion

Clearly, the Legislature never meant for a dependent spouse to be entitled to life insurance where she has the ability to contribute to her own needs and has significant assets on which to rely in the event obligor died and alimony ceased. Accordingly, in our fact pattern, the Wife is not entitled to have the Husband pay for a life insurance policy to secure his alimony obligation (remember, all other obligations have been satisfied) to the Wife, since she would not be destitute if he were to die without the life insurance.

Finally, if one were to conclude that life insurance was necessary, the following factors must be considered. First, the security for the obligation to pay alimony should be decreased in recognition of the fact that with each passing year, the dependent spouse has already received that year's spousal support and is not entitled to collect it twice. Second, the amount should be adjusted for the present value of the future dollars. The analysis requires a determination of how long the obligation would last and calculations for each year over the course of that obligation. However, as there is no mandate that life insurance serves as replacement value of the alimony obligation, it should not depend solely upon the years the obligation would last. Finally, the life insurance obligation should be reduced based on the taxes that the Wife would not have to pay on life insurance, but would be obligated to pay on alimony.

In addition to the economic factors, the amount of life insurance should be adjusted for intangible factors including, but not limited to, the assets of the dependent spouse, her income potential, age and health, the fact that the dependent spouse will receive life insurance if she survives the obligor, even if she subsequently remarries and the fact that the dependent spouse will receive this benefit regardless of future downward modification that may have otherwise occurred under Lepis v. Lepis, 83 N.J. 139 (N.J. 1980).

In many — if not most — matrimonial actions, counsel or the court almost always automatically ensure that the dependent spouse is provided with life insurance, despite the fact that the statute authorizing life insurance to secure alimony is permissive and not mandatory. In many cases where there is a child support obligation or an equitable distribution obligation, the purpose of life insurance is clear: to secure these obligations, in the event the paying spouse dies prior to their fulfillment. Life insurance protects the supported spouse by providing a source of funds to assist with the support of the children (an obligation that survives the death of the spouse) and by assuring that the payment of equitable distribution is received (because the payment should not depend on the life or death of the obligor).

In a situation, however, where child support and/or equitable distribution are not issues, the question arises as to whether or not life insurance is an appropriate security measure for the payment of alimony. Let's look at the following hypothetical. Assume the following facts in a divorce under New Jersey law:

The Husband is 50 years old, the Wife is 48 years old, and their children are emancipated (therefore, child support is not an issue). They have been married 20 years. The parties have entered into a Property Settlement Agreement, which provides for permanent spousal support in the amount of $120,000 per year, payment of equitable distribution to the Wife in the amount of $1 million, and division of retirement accounts on a 50/50 basis, which is approximately an additional $250,000.00 in retirement funds to the Wife. The Wife is to receive her entire equitable distribution (ie, $1 million) at the time of the divorce, which is scheduled to take place immediately upon the signing of the Property Settlement Agreement.

The issue now is whether the Wife is entitled to have life insurance on the life of her soon-to-be ex-husband, where she would be the beneficiary, when there is no child support obligation and equitable distribution has been paid. Despite lawyers' and courts' almost automatic belief in securing alimony obligations, life insurance should not be an automatic entitlement of the dependent spouse.

Statutory and Case Law

The state statute provides for termination of alimony upon the death of the payee. Thus there is nothing to secure because presumably once the payee dies so does his obligation. Furthermore, the statute does not mandate life insurance as security for alimony, but neither is such security prohibited. In other words, while it is not mandatory, it is permissive. Specifically N.J.S.A.2A:34-25 provides:

“Alimony shall terminate upon the death of the payer spouse … Nothing in this act shall be construed to prohibit a court from ordering either spouse to maintain life insurance for the protection of the former spouse or the children of the marriage in the event of payer's death.”

Thus, unlike child support and equitable distribution obligations, which survive the death of the obligor and require security for the due performance of these obligations, the alimony obligation does not survive. The dependent spouse has no right to expect more from the supporting former spouse than the support to which she would be entitled had the parties remained married. Khalaf v. Khalaf , 58 N.J. 63, 67 (1971). If the parties had remained married, and the supporting spouse died, his income stream from employment would have ceased. This is the reasoning used by the courts to determine whether to award alimony.

This reasoning also holds true where the parties did not maintain life insurance during their marriage, and upon the working/paying spouse's death, the dependent spouse would only have the remaining assets and herself to depend upon. By requiring the working spouse, at the time of divorce, to maintain life insurance as security for alimony beyond his lifetime, the divorced spouse actually ends up in a far superior position than she would be if she had remained married. Moreover, her lifestyle is now superior to his, because he is required to incur a cost that was never part of the marital lifestyle.

Given that the statute provides for termination of alimony upon the death of the obligor, the dependent spouse cannot and should not expect from the supporting spouse more than that to which she would be entitled if the parties had remained married.

As stated, the alimony statute specifically does not require the obligor to maintain life insurance as security for alimony. The statutory mandate that alimony terminates upon the death of the paying spouse, coupled with the legislature's refusal to impose the obligation to maintain life insurance as security for alimony payments after the paying spouse's death, leads to the fair and logical conclusion that life insurance is not an automatic entitlement. Thus, provision of life insurance for the purpose of securing alimony should be the exception rather than the rule. The notion that the use of life insurance as security for spousal support is not an automatic right is not only supported by statute, but by the case law analyzing the statute.

NJ Supreme Court Weighs In

The statute dealing with life insurance and the legislative intent in enacting it was analyzed by the New Jersey Supreme Court in Jacobitti v. Jacobitti , 135 N.J. 575 (1994). The Jacobitti case dealt with a wealthy 87-year-old man with assets of over $1.5 million, for whom the cost of obtaining life insurance was prohibitive due to his age. His ex-wife, although 19 years younger than he, was confined to a wheelchair due to the debilitating and deteriorating effects of multiple sclerosis. She received only $79,000 in equitable distribution, making her totally dependent on her ex-husband for support and would, without the assistance of the court, become destitute and a public charge.

In that case the New Jersey Supreme Court stated:

“under the 'unique circumstances of the case,' the trust was the 'appropriate remedy to fulfill the Legislature's intent of authorizing life insurance for the protection of a dependent spouse in the event of the payer's spouse's death.” (emphasis supplied) Based on the facts before it, the court went on to state “this case presents us with classic example of what the Legislature sought to avoid when it enacted the life insurance statute: an ex-spouse who would be penniless but for alimony.”

Thus, the Jacobitti court clearly recognized that the Legislature did not intend life insurance to become an automatic entitlement of the receiving spouse — despite the fact that both lawyers and the judges alike presumed the existence of such an entitlement — but a means of assuring that the dependent spouse would not be destitute and a public charge upon the death of the obligor.

Conclusion

Clearly, the Legislature never meant for a dependent spouse to be entitled to life insurance where she has the ability to contribute to her own needs and has significant assets on which to rely in the event obligor died and alimony ceased. Accordingly, in our fact pattern, the Wife is not entitled to have the Husband pay for a life insurance policy to secure his alimony obligation (remember, all other obligations have been satisfied) to the Wife, since she would not be destitute if he were to die without the life insurance.

Finally, if one were to conclude that life insurance was necessary, the following factors must be considered. First, the security for the obligation to pay alimony should be decreased in recognition of the fact that with each passing year, the dependent spouse has already received that year's spousal support and is not entitled to collect it twice. Second, the amount should be adjusted for the present value of the future dollars. The analysis requires a determination of how long the obligation would last and calculations for each year over the course of that obligation. However, as there is no mandate that life insurance serves as replacement value of the alimony obligation, it should not depend solely upon the years the obligation would last. Finally, the life insurance obligation should be reduced based on the taxes that the Wife would not have to pay on life insurance, but would be obligated to pay on alimony.

In addition to the economic factors, the amount of life insurance should be adjusted for intangible factors including, but not limited to, the assets of the dependent spouse, her income potential, age and health, the fact that the dependent spouse will receive life insurance if she survives the obligor, even if she subsequently remarries and the fact that the dependent spouse will receive this benefit regardless of future downward modification that may have otherwise occurred under Lepis v. Lepis , 83 N.J. 139 (N.J. 1980).