Life insurance as security for support: the clause most agreements get wrong

Nobody likes thinking about an ex dying, especially while you are still sorting out the agreement. But a separation agreement that provides ten years of child support quietly assumes the payor will be alive for those ten years. Usually they are. When they aren't, the children's support can depend on one or two sentences written years earlier.

Whether support survives the payor's death depends on where you live and how support was set. In Ontario, for example, a support order made under the Family Law Act binds the payor's estate unless the order says otherwise. Elsewhere, and under many private agreements, it may not, which can leave the family to bring a dependants' claim against the estate: slow, costly and uncertain, often while competing with a new partner or other children. Life insurance avoids most of that. The problem is that many life insurance clauses are one vague sentence, and a vague sentence is very hard to enforce against an insurer or an estate.

Why it matters

In Canada, courts can order that support be secured, and they regularly order life insurance for that purpose. Section 34(1)(i) of Ontario's Family Law Act, for example, expressly allows an order requiring a spouse to designate the other spouse or a child as irrevocable beneficiary of a life insurance policy. In the US, most states allow courts to order life insurance to secure child support and alimony, and many divorce decrees include it. But orders and agreements only work if they are specific enough to enforce.

The elements of a clause that works

1. The amount

Tie it to the obligation. A common approach is the total remaining support (child support to the end of expected dependency, plus any spousal support term), with a margin for post-secondary costs. A parent paying $1,500 a month for twelve more years owes about $216,000 in child support alone, before any shared child expenses (section 7 in Canada) or spousal support; a $50,000 policy would not come close. Some agreements let the amount step down each year as the obligation shrinks, which keeps premiums manageable. Say whether the amount is fixed or declining, and if declining, by what schedule.

2. The policy

Name the policy if it exists, or require one to be obtained within a set period, such as 60 to 90 days, with proof. Term insurance usually fits best: it is relatively cheap and matches a time-limited obligation. Group insurance through an employer can count, but it usually ends with the job, so require replacement coverage if employment ends.

3. The beneficiary

Two main options. The recipient parent as beneficiary in trust for the children, which is simple but relies on that parent using the money for the children. Or a formal trust with a named trustee, which is more protective and costs more to set up. For spousal support, the recipient is usually the beneficiary directly. Either way, the designation should be irrevocable, which means the payor cannot change it without the beneficiary's consent. In the US, decrees commonly order the designation and prohibit changes.

Avoid naming minor children directly as beneficiaries without a trust. In most places, insurers cannot pay a large sum straight to a child, and the money may end up held by a court or a public official until the child turns 18 or 19.

4. Ownership and premiums

The payor usually owns the policy and pays the premiums. Some agreements make the recipient the owner so they receive lapse notices directly and can pay a missed premium to keep the policy in force. That is the more secure structure where trust is low.

5. Proof

Require an annual statement from the insurer confirming the policy is in force, the amount, and the beneficiary designation. Without this, the recipient may only learn the policy lapsed after the payor has died.

6. What happens on lapse or failure

If the payor fails to keep the insurance, the agreement should say that the remaining support obligation becomes a first charge on the estate, that the recipient can claim the equivalent amount from the estate as a creditor, and that the recipient can pay premiums and recover them from the payor. Some agreements also let the recipient go straight to court without the usual dispute resolution steps.

7. Binding the estate

State expressly that the support obligation binds the payor's estate, and that the insurance is security for that obligation, not a replacement for it. If the insurance pays out, the estate's obligation is reduced accordingly. This sentence is what gives the recipient a claim if the insurance fails.

8. Duration

Tie the obligation to the support term: until the youngest child is no longer entitled to support, or until spousal support ends. Say how it ends, so the payor is not carrying coverage forever.

Both parents

Insurance is usually discussed for the payor, but the other parent's death matters too. The surviving parent suddenly carries all the costs of raising the children, and loses that parent's share of shared child expenses and day-to-day spending. Many agreements require both parents to carry coverage for the children, in proportion to their incomes or obligations.

Existing policies and beneficiary drift

Separation does not change beneficiary designations. If your ex is still named on a policy you own and you don't want that, change it as soon as the agreement allows. If your agreement requires you to keep them named, don't change it. Insurers pay the named beneficiary, generally regardless of what a will says. Check workplace group policies and pension death benefits too. Read why your will and beneficiaries need updating.

If the payor cannot get insurance

Health problems can make coverage unavailable or very expensive. Alternatives include a larger lump-sum payment now, a charge registered against property, an annuity, or a trust funded from the settlement. The point is not the insurance itself; it is making sure the obligation survives the payor. The agreement should include a fallback for uninsurability so the security doesn't simply disappear.

Tax

Life insurance death benefits are generally received tax-free in both Canada and the US. Premiums paid to secure support are generally not deductible. In Canada, if the agreement requires the payor to pay premiums on a policy the recipient owns, those payments may in some cases be treated as support for tax purposes, with consequences for both of you. Ask an accountant before you sign, and draft the clause to match what you intend.

What to do this week

1. List every policy on both of your lives: individual, workplace group coverage, and any coverage tied to a mortgage or credit card.
2. Check who the beneficiaries are now. Ask the insurer or your HR department for written confirmation.
3. Estimate the remaining support: monthly amount times months left, plus a margin for post-secondary costs.
4. Get a term insurance quote for that amount, so you know the real premium before negotiating.
5. Bring the eight elements above to your lawyer or mediator, or check that your draft agreement covers each one.

When the agreement is signed, the after-signing checklist will remind you to put the policy and beneficiary changes in place.

This guide is legal information, not legal advice, and it is written for a general audience across Canada and the United States. Family law is provincial and state-based and changes over time. Before you rely on anything here for your own situation, confirm it with a qualified family lawyer in your province or state. FairWell can connect you with one through the professional directory. How we write and check our guides.