According to the Pew Research Center, there is no longer one dominant family form in the U.S., with one out of three Americans being a part of a blended family as a stepparent, a stepchild or otherwise being from a previous marriage or relationship. In fact, the study says that 2,100 blended families are estimated to form every day in this country.
Along with these evolving family structures comes the need to plan for new financial contingencies such as the care of a surviving spouse in the case of a death, income replacement from a disability, alimony and child support obligations and unique inheritance wishes. At C3 Financial Partners, we recognize that life insurance plays an outsized role in protecting blended families.
While both spouses are alive, everyone in blended families may get along. This can change at the death of a spouse and a family may be torn apart over financial matters. When this happens, it is not unusual to find that the bulk of a couple’s assets pass to the surviving spouse on the death of the first. Often, the children of the deceased spouse may not be provided for as the deceased spouse would have wanted.
Conversely, if assets are left to the children at the death of their parent, there may be insufficient assets to provide for the surviving, non-parent spouse. In addition, most states require that a portion of an estate, usually half, be left to a spouse, or a surviving spouse can make a claim against the estate that may undermine the intention of leaving assets to the children.
Life insurance can provide estate equalization and peace of mind that inheritance intentions are fulfilled. By establishing an irrevocable Qualified Terminable Interest Property (QTIP) Trust and funding it with life insurance, a grantor (spouse) can provide for a non-parent surviving spouse and retain control of how the trust’s assets are distributed once the surviving spouse dies.
Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that the spouse is taken care of for the rest of their life. At the death of the non-parent surviving spouse, the principal in the Q-TIP is left to the beneficiaries of the trust.
If the non-parent surviving spouse is close in age to the deceased spouse’s children from an earlier marriage, the wait to receive the remaining trust principal could be decades. Additional life insurance held by the trust and left to these children can provide an instant inheritance.
Our team at C3 Financial Partners is careful not to make assumptions about what a successful plan looks like when addressing the needs of blended families. We take time to clarify the planning objectives of each individual and the family unit.
Divorce and Children
Most divorce decrees include some type of divorce settlement payments – typically alimony and/or child support. Although many alimony commitments end at the death of the payor spouse, some must be paid in a lump sum from an estate, endangering the money needed for the payor’s current family. In some situations, the payor may voluntarily want alimony to continue.
Similarly, a payor may either be obliged, or desire, to continue to support children from a previous relationship while providing for their current family. A life insurance policy allows someone to leave money for the care of a former spouse and to maintain child support.
Another risk that is almost always overlooked but has a much higher probability of occurring than death, is the total disability of the payor. While some individuals may have disability income insurance through their employer, or carry personal disability insurance, this coverage usually just covers a portion of their income. To mitigate the risk of a reduction in income and to fulfill support obligations following a disability, many are turning to supplemental disability policies or hybrid life insurance contracts with disability payment features.
C3 Financial Partners proactively plans for the continuing complexity and diversity most families will encounter over generations.
Long-Term Care Coverage
A former spouse’s long-term care costs could fall to children, saddling them with unplanned and often exorbitant expenses. Statistics show that 70% of those who reach age 65 will need long-term care, which Medicare often does not cover. And Medicaid is only available after most other assets have been exhausted.
In-home care or assisted-living care is expensive, and most experts believe costs will only go up. Excluding specific market variations, the average cost of a nursing home ranges from $60,000 to $120,000 a year; hiring an aide to spend six hours a day in your home starts at around $40,000 a year.
By purchasing a long-term care (LTC) policy, this burden may be reduced or eliminated. These policies are available for both traditional LTC policies and LTC + Life Insurance Hybrid plans.
C3 Financial Partners has decades of experience in understanding how the legal and financial decisions of individual family members impacts other members.
Don’t Worry About Probate
Life insurance is paid directly to beneficiaries, and it doesn’t go through the wishes contained in a will or through the probate process. Policy benefits are typically paid much faster than the time it takes to settle an estate – usually by several months or more.
During that time, there are still bills to pay, mortgage payments to make and many other expenses to meet. Those costs can put a strain on your family while they’re waiting for the estate to be settled. One in four people say they would feel the financial effects within a month if the primary wage earner in their household died, according to the 2020 LIMRA study. In contrast, life insurance claims are typically paid swiftly once beneficiaries submit a claim, giving the family liquidity they need during a challenging time.
Do Not Forget Existing Life Insurance
At the time of a marriage or divorce, it is important to have any existing life insurance inventoried and reviewed. Too often, life insurance is a family’s largest, unmanaged asset and a divorce or the formation of a new family can complicate existing policies. Cash value in policies can be considered a marital asset and included in any financial calculations. Beneficiary designations may need to be updated to reflect a current spouse and to protect children from a prior relationship.
At C3 Financial Partners, we look forward to helping our clients gain clarity in their goals and objectives, confidence that they are making the right decisions, and the coordination with other advisors.