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In the past, I have discussed the importance of having life insurance in a divorce settlement, particularly to protect spouses and children who depend heavily on support payments to stay financially solvent. This month, I want to touch on another type of policy that is closely related to life insurance: long-term disability.

The possibility of the payer spouse becoming disabled is often overlooked during a divorce. There are so many other issues to deal with (e.g., alimony, child support, parenting plans, division of property, family-owned businesses, tax consequences, etc.), and many times, disability is never even brought up. This leaves a potential scenario unaddressed, which puts everyone involved at risk for future financial hardship.
Here is a common scenario to illustrate what I am talking about. The payer spouse is required to pay X amount of dollars each month for alimony and child support. This spouse has a stable job and sufficient income to cover these monthly obligations, so everything seems fine. A few years later, the payer spouse suffers an illness as is no longer able to work.

Depending on the type of work they are in, they may have a long-term disability policy through their employer. The problem is that these types of policies typically cover only 40% to 60% of their income. And if no such policy exists through work and they are unable to qualify for workers’ comp coverage, the only alternative at that point is Social Security. This is far from a guarantee, however, because roughly 70% of Social Security Disability claims are denied.

In this scenario, the likely result is that the payer spouse can no longer keep up with support payments, so they go to court to modify the original settlement. Though the original decree states that payments must be made, and the receiving spouse and children depend on this money for survival, the court often has no other choice than to allow the modification to go through and the support payments to be reduced or eliminated.

The Benefits of Divorce Disability Insurance

There are new insurance products on the market that can financially protect family members during a divorce. For example, a divorce disability policy can be added to the settlement with the receiving spouse and children listed as the beneficiaries. This type of policy can be written to cover alimony, child support, college tuition, and any other financial obligations the payer spouse has. Disability riders can also be added to many life insurance policies to provide more comprehensive protection for divorcing couples and their children.

During divorce mediation, I work closely with the spouses to ensure that all important issues are fully addressed. When necessary, we bring in accountants, financial advisors, insurance agents, and other experts to provide professional guidance with various aspects of the settlement. Because the majority of the mediation process is done without the involvement of the courts, the fees are typically much lower, and the process can usually be completed much sooner.

Disability Could Happen to Anyone 

Statistics show that 37 million Americans are classified as disabled, and one out of four working adults will become disabled before they reach retirement age. In addition, working adults are four times more likely to develop a long-term disability than to die during their working years. If you are facing a divorce, this is a potential scenario that must be addressed. Be sure to bring this up during settlement talks so this issue is dealt with long before there is a chance of a financial catastrophe occurring.

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