Issues to consider in Divorce, Separation and Life Insurance Planning

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Div n Ins

Before separation or divorce a review of financial obligations must be undertaken to determine appropriate planning. Life insurance can be an efficient method of funding the obligations of both child and spousal support; it can also protect against dependant relief claims against an estate or where a spouse may be seeking a claim of equalization or division of property. The ability to make a claim for property division upon death will vary depending upon provincial legislation.

In many instances, provincial legislation may empower the court to require a spouse who has a policy of insurance to designate the other spouse or child as the beneficiary irrevocably. The Divorce Act has no comparable provision. However, jurisdiction to order that life insurance be put in place or that existing life insurance be irrevocably designated to be paid to a particular party on death of the life insured can fall under section 15.1(4) and 15.2(3) of the Divorce Act. These sections allow a court to impose terms, conditions or restrictions in connection with support as the court determines to be fit and just in relation to both child and spousal support respectively. Whether the obligation exists under a court order or agreement, the insurance should remain in place until the obligation ceases to exist.

However, insurance may not always be security for a support obligation. The Ontario Court of Appeal considered the provisions of a separation agreement to determine whether the insurance policy was merely security for a diminishing support obligation or whether it was an independent obligation. The court had concluded that if the parties intend the insurance policy to be security for the support payments and nothing more it should have been addressed in the agreement.

While the court has the power to order life insurance be put in place to secure the support obligation, it may not always be exercised. In Caron v. Berube 2008 (Ontario S.C.) the wife sought to vary child support and obtain an order that she be designated as the beneficiary of a life insurance policy to secure child support. The original separation did not contemplate life insurance. The court was not prepared to order the husband to purchase the insurance where the separation agreement did not address it.

Upon separation and divorce beneficiary designations in any life insurance policy should be reviewed. If the former spouse is named as a beneficiary, the designation may need to be changed to ensure that the proceeds are no longer payable to the former spouse. In the province of Quebec, divorce will automatically revoke a beneficiary designation made in favour of a former spouse even where irrevocable. However, in all other provinces the designation will remain in effect unless revoked by the owner. When a spouse is made an irrevocable beneficiary this poses a very difficult situation; the irrevocable beneficiary must provide his or her consent to change the beneficiary designation. As well, any transactions relating to the policy including reallocating funds within the policy or making cash value withdrawals will require the consent of the irrevocable beneficiary. The risk of the former spouse withholding consent is at issue.

In this instance the policy owner has two choices: The policy owner can stop making payment and allow the policy to lapse in which case, notice will not be provided to the irrevocable beneficiary of such a lapse. However, in the case of Manna v. Manna 2008 B.C.S.C. 1365 (CanLII) the Court ordered the insurance carrier to provide notice of the lapse so as to allow the irrevocable beneficiary who was the recipient of child support to deal with the unpaid premium. The other option is to negotiate consent by the spouse to change the irrevocable designation; this may be included in the terms of the separation agreement or court order.