Divorce often leaves families broken. Parents go in different directions. Asset are divided. Kids end up caught in the middle. It is a trying time in the best of circumstances.

But what happens when the primary income-earner dies prematurely after the divorce? For the recipients of spousal and child support the consequences can be devastating. Family lawyers know this, of course, and thus almost always insist that the divorce settlement includes life insurance on the spouse making support payments.

But, in our experience as financial planners, the amount of life insurance is often insufficient to meet the terms of the agreement.

Let’s consider a hypothetical example.

Tom is 42, an attorney at well-known law firm in Portland. Lisa is 37, and was educated and trained as a software engineer. However, she has been out of the workforce for 10 years, as she has been raising their two children, Tyler (10) and Brittany (8). Tom and Lisa, in their divorce agreement, have agreed that Tom will provide Lisa with spousal support for 10 years in the amount of $10,000 per month. In addition, Tom will provide child support of $500 per month per child until each child reaches age 18. Further, Tom has agreed to pay for 70% of the costs associated with educating their children.

How much life insurance should be placed on Tom’s life to replace these spousal and child support payments should Tom die prematurely?

Let’s start with the spousal support. We need to calculate the sum today that would provide $10,000 a month for 10 years. If we assume that dollars received today could be invested at 5% until paid out (known as the “discount rate”), the lump sum today we need is $947,000.

What about child support? We need $500 per month for 8 years for Tyler. That lump sum, assuming the same 5% discount rate, is $39,700. For Brittany, the lump sum is $47,400.

Now what about college? In the divorce agreement, Tom and Lisa need to agree on a price tag for the cost of college. It could be a state school, a private school or even a specific university. They then need to use that figure to determine how much life insurance needs be on Tom’s life in order to pay his share of the college costs, should he die prematurely. Let’s assume they agree on “full freight” (which includes tuition, room and board) for the University of Oregon. A quick check on the internet indicates the total cost today for one year is just under $24,000. We need to calculate the lump sum that would pay for four years of college when Tyler and Brittany turn age 18. However, we will account for the fact that the cost of college has been rising faster than the overall rate of inflation. We will inflate the cost of college at 4%, and again use a discount rate of 5%. Our calculation is that for Tyler we need a lump sum of $87,000, and for Brittany we need $84,000. Tom has agreed to pay 70% of this cost.

So, the life insurance on Tom – covering spousal support, child support, and his share of the cost of college – should total $1,114,000. We will round up and assume the agreed-upon amount of life insurance is $1.2 million.

What kind of life insurance Tom have? In this situation, the most effective type would be term life insurance. Typically, “level premium”, “level death benefit” life insurance would be used. It might also be possible to use decreasing term life insurance (in which the amount of life insurance declines over the life of the policy). But that product is not common in the insurance industry.

How much would a policy cost, assuming Tom is in reasonably good health? A 20-year level-premium term life insurance policy of $1.2 million would range from $940 to $1,230 per year. Who should be the owner of this contract? Lisa. Who should be the premium payer? Tom. Who should be the beneficiary? Lisa.

The divorce agreement should require that Tom provide documentation that he has purchased the life insurance. In addition, he should provide Lisa with documentation that he has faithfully paid the annual premium.

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