Life insurance as way to secure maintenance

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A few months ago, we reported on the phenomenon of an ex-spouse winding up with a windfall, where a former spouse inadvertently fails to remove her as his designated life insurance beneficiary.

This often happens when a term life policy has no present cash value, the parties consider it a “non-asset” and the court does not allocate life insurance rights and benefits due to the lack of evidence. New legislation should avoid this result by making two important changes in the law.

Public Act 97-0608 took effect with the start of the new year and does two critical things.

First, it directs the court to allocate life insurance rights and benefits, and any obligation for premium payments, equitably between the parties upon entry of a divorce judgment or declaration of invalidity of marriage. The court shall do this as part of its property division under 750 ILCS 5/503, regardless of whether the life insurance is whole life, term life, universal life or otherwise and irrespective of whether its value can be ascertained. By mandating the allocation of life insurance policies, or any interest therein, under 750 ILCS 5/503, these policies should no longer go unnoticed and an ex-spouse is more likely to take immediate action to remove his or her former spouse as the beneficiary when awarded the policy as an asset.

Second, Public Act 97-0608 expressly allows the court to reasonably secure an award of maintenance through life insurance on the payer’s life. The court may secure such an award notwithstanding the fact that maintenance terminates, as a matter of law, upon the death of the payer or the payee.

The terms upon which a maintenance award may be secured can either be agreed upon by the parties or decided by the court, subject to certain limitations set forth in the new statutory Subsection (f) of 750 ILCS 5/504.

With respect to existing life insurance, the court may allocate death benefits, the right to assign death benefits or the obligation for future premium payments between the parties, provided the court has sufficient evidence and makes certain findings.

The court may also require that new life insurance be obtained to secure maintenance. If it does this, it may only order the payer (the maintenance obligor) to cooperate on appropriate steps to obtain insurance on his life and shall require the payee (the maintenance obligee) to pay for it. Any review of a life insurance application shall be conducted by the court in camera to protect the payer’s privacy rights.

A judgment shall expressly state that death benefits paid under life insurance maintained or obtained for the aforementioned purposes is excludable from gross income under the Internal Revenue Code, absent a contrary agreement of the parties. In addition, premiums paid for life insurance pursuant to court order are deductible from net income for purposes of calculating child support under 750 ILCS 5/505.

Prior to the enactment of Public Act 97-0608, there was a conflict among appellate districts in Illinois as to whether maintenance could be secured by life insurance.

In the 4th District, the court had the discretion to secure maintenance obligations with life insurance. In re Marriage of Walker, 386 Ill.App.3d 1034 (4th D. 2008).

In the 3rd District, the court did not, the theory being that maintenance terminates as a matter of law upon either party’s death. In re Marriage of Ellinger, 378 Ill.App.3d 497 (3d D. 2008). The 3rd District reasoned that, without express statutory authority, the court could neither order maintenance that would extend beyond the death of either party nor require security for the payment of maintenance after the death of the obligor.

Public Act 97-0608 gives the 3rd District the express statutory authority it was looking for. Now courts throughout Illinois may exercise discretion in securing maintenance obligations with life insurance within the parameters of the new 750 ILCS 5/504(f).

Article originally appeared in the January 2012 issue of Chicago Lawyer