Getting divorced? Consider disability income insurance

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Aug 24, 2021

Divorce proceedings cover a lot of ground: The division of property, child custody, and child or spousal support. While the terms of their agreement may sit well with both parties in court, it isn’t always clear that a loss of income down the road could leave all involved in a financial lurch, a risk that can potentially be mitigated with disability income insurance.

Many divorce decrees require life insurance to protect against a total loss of alimony. But oftentimes, the potential for disablement and its consequences get overlooked. (Related: The role of life insurance in divorce)

Indeed, if the breadwinning spouse should lose their job, the monthly payments they committed to could in some cases be renegotiated and reduced—or even halted temporarily. Similarly, if the spouse who earns less loses their job, the courts could potentially require the working spouse to kick in more during the period of unemployment to help their children maintain their standard of living.

The biggest potential threat to both spouses’ financial security, however, is a long-term or permanent loss of income due to disability.

“Divorce agreements typically hinge on several factors, one of which is an equitable division of marital assets” said Chad Tourin, an attorney and associate managing director of Coastal Wealth in Ft. Lauderdale, Florida. “Common marital assets include things such as real estate, retirement plans, and investment portfolios, but quite often the largest asset any of us will ever have is our ability to earn an income.”

During divorce proceedings, he said, attorneys and financial professionals often focus on current income and overlook earnings potential. For example, the economic value of a 32-year-old who makes $100,000 per year and gets divorced is not $100,000, but rather $3.5 million — $100,0000 X 35 years until age 67. (Calculator: How much disability income insurance do I need?)

“The biggest problem when ignoring the full economic value of a divorcée is that many of the agreements in the divorce would fall apart if income were to suddenly stop due to illness or injury,” said Tourin. “Orders for alimony, child support, etc. would become meaningless because it would be impossible for the divorcée to make those payments.”

One solution: Include language in the divorce contract that requires the working spouse (or both, if both are working) to maintain disability income (DI) insurance coverage to protect each other’s interests, with reasonable reserves maintained to pay the premium in the event of a temporary period of unemployment.

The benefit of DI insurance coverage

Disability income insurance is designed to replace a portion of your income if you are unable to work due to a qualifying illness or injury.

Few Americans have the savings to support themselves when they’re not producing a paycheck. In fact, nearly 69 percent of individuals in pre-pandemic America reported that they would experience financial hardship if their paychecks were delayed by even a week, according to the latest report from the American Payroll Association.1

And that does not include the elevated medical costs associated with a disabling condition. The Centers for Disease Control and Prevention reports that the mean expenditure for a person with a disability exceeds $17,000 per year.2

While many adults (particularly parents) make life insurance coverage a financial priority, few appreciate the need to maintain disability income insurance to protect their income stream — despite the fact that adults in the U.S. are far more likely to experience a disability than they are to die prematurely.

According to the Social Security Administration, 1 in 4 of today’s 20-year-olds will suffer either a temporary or permanent disability before reaching retirement age. As a result, they may need to rely on Social Security disability benefits for income support, which is often insufficient to maintain their prior lifestyle.3 (Related: Uncomfortable truths about disability)

Disability income insurance and divorce

Disability income insurance is often overlooked in cases of divorce, said Tourin, because most attorneys have the mistaken belief that such policies only pay out if someone were permanently and totally disabled.

“However, most quality disability policies with a ‘true own occupation’ definition of disability will pay benefits if the individual can no longer perform the material and substantial duties of their chosen occupation,” he said.

In effect, this means that if the divorcée were unable to continue working in the career for which they were trained due to health issues like back problems, a stroke, or a mental health condition such as depression, their DI benefit would potentially replace part of their income and position them financially to continue making the agreed-upon alimony and/or child support payments to their ex-spouse.

Larry Singer, a partner and financial professional with New Jersey Life & Casualty in Livingston, New Jersey, said he asks all his clients in the midst of divorce to consider DI insurance coverage.

“The legal system is very good at writing divorce agreements, but not so good at securing these important financial agreements that set the stage for the rest of your life,” he said. “Alimony and child support may be crucial to maintaining a divorcée’s lifestyle for herself — sometimes, himself f— and any children. We all know that our lifestyles are supported by a thin thread, which is our ability to earn a living.”

Divorcées who can’t convince their support-providing ex-spouse to purchase DI insurance on their own may need the court to step in, as ex-spouses don’t have an insurable interest in one another. Indeed, insurance companies often require the insured to be the owner of the policy, which would require that person to go through underwriting.

In cases where the supporting ex-spouse doesn’t want to get a DI insurance policy, Singer said, the parties might instead agree during divorce proceedings to earmark a portion of their alimony payments so that the working spouse purchases a DI policy and names the non-working spouse as beneficiary. And the court order should state the policy cannot be discontinued or changed.

In some cases, said Singer, this arrangement might even be ideal because the spouse receiving financial support might not have assurance that their ex-spouse was paying the premiums or changed the terms of the policy.

“You can’t, as is said, squeeze water from a stone,” said Singer. “But you can ensure that alimony and child support will continue regardless of a disabling event, which is otherwise outside of our control.”

During negotiations, he said, the spouse collecting alimony and child support payments should be aware that group DI insurance coverage offered through their ex-spouse’s employer may be insufficient.

Why? Group DI policies may not be portable, meaning that you cannot take them with you when you leave (or get fired from) your job. Many also provide too small a benefit to adequately mitigate financial risk or limit coverage to the employee’s base salary (not including bonuses or commissions). And some workplace DI policies provide benefits only if the policyowner can no longer produce a paycheck at all, including at minimum wage jobs. (Learn more: 6 ways group disability income insurance may fall short)

A private DI policy can be customized to include the kind of protection your household needs.

Divorce proceedings can be costly and complex. Many couples seeking to sever ties hire an attorney to protect their financial interests. As negotiations get under way, you may also wish to consult a financial professional to help determine whether disability income insurance coverage makes sense for you.

Discover more from MassMutual…

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1American Payroll Association, “Getting Paid In America,” September 21, 2020.

2 Centers for Disease Control and Prevention, “Disability and Health Healthcare Cost Data,” March 8, 2021.

3 Social Security Administration, “Faces and Facts of Disability,” 2019.

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.