Divorce is difficult enough but when a spouse or dependent child has health issues, the stakes are even higher. It’s also important to plan for unexpected problems that might arise long after the divorce papers are signed. After all, no one is immune from medical difficulties that could blow through a seemingly generous divorce settlement in the blink of an eye.
Here are three major areas to think about for your clients.
Health Insurance Costs
The most common health related problem that couples face in a divorce settlement is how to provide for health insurance coverage for a non-working spouse. If you both have coverage under one spouse’s employer group plan, once you are divorced, the non-employee spouse is no longer considered a “dependent” and therefore is not eligible for coverage under the employee spouse’s plan. This means that non-employee spouse is suddenly faced with finding an individual plan of some sort that most likely has a much higher premium and possibly a reduced level of coverage.
This problem can be even more impactful in a “gray divorce” — when a divorcing older couple is nearing or in retirement. As we age, our health insurance becomes even more valuable and more expensive. That is why in gray divorce this expense becomes an even more important part of the settlement.
Because this cost can be so high, many older couples decide to file for legal separation instead of divorce so that the other spouse can stay on a company health insurance plan at least until they are eligible for Medicare coverage.
If legal separation is not an option, you as an advisor should make sure to research the actual monthly healthcare costs for the non-employee spouse. In most cases I consult with a health insurance agent to get the details on plans available and the associated costs. Do not forget to include in this analysis your client’s prescriptions, co-pays, deductibles and other out-of-pocket expenses.
And remember, these costs will continue to rise so it’s prudent to do an inflation-adjusted cost projection. Most planning models have a built-in inflation estimate based on historical averages. Ours uses 2.25% until that person is 100.
These numbers should be provided to your client’s legal team with the goal of negotiating to add this to the amount of support needed in the settlement. In California, for example, one aspect of determining the need and amount of spousal support is the health and age of the parties. This is part of the statute. If that is the case in your client’s state you should be sure to use these projections in the negotiation.
Long-term care is another major health-related expense that divorcing spouses, particularly in gray divorce, may need to plan for. Based on statistics provided by the Administration on Aging (“AoA”), an agency of the U.S Department of Health and Human Services, someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and support in their remaining years. In addition, women are more likely to need care and will need it for a longer average period of time (3.7 years) compared with men (2.2 years).
Current estimates for the cost of care are at least $4,000 per month. That expense can have a large financial impact for a couple, and an even larger one for a couple post-divorce.
I am currently working with a client in mediation and the cash flow projections we did show that a long-term care expense of $3,000 per month for three years would completely deplete my client’s assets based on the current settlement proposal.
Her soon-to-be ex-partner suggested that if she does need long-term care in the future, she could just reach out and ask for more money. Obviously, that is not a good solution for several reasons, including the potential for added legal costs to make a future order for additional monies. And when former spouses move on with their lives, they typically have little or no incentive or desire to help that ex-spouse financially.
Instead, I suggested that it would be better to include a long-term care policy in the settlement and allocate assets to cover the premiums. I also advised my client, her partner and the mediator that long- term-care premiums are almost always less for a married couple so it would be important to bump up the numbers.
The good news is that long-term-care coverage and premiums typically won’t change for spouses even if they divorce shortly after the policy is written. Make sure your client is aware of this and considers working with the other spouse to get coverage for both of them before the divorce is final. It just might make or break the financial survival of one or both of the spouses.
Medical Care for a Disabled Child
Another health-related issue that can come up in a divorce is the determination of the ongoing financial responsibility for medical expenses for a child who will be unable to provide for themself even into adulthood.
In most states, a child support order ends when that child is 18 and out of high school. However, with a disabled child, the court can award child support for a lot longer and for a larger amount that is based on the expected medical care expenses of the child.
In this case it is very important for the parents to be able to work together and communicate well so that the child will always get the best care possible. I suggest including a parenting coach and the child’s medical team in an annual meeting to make plans for care and anticipated expenses. It is also very important in this situation to have a life insurance policy and a disability insurance policy on the support provider because the loss of this income will have a much more severe impact on the health and wellbeing of a disabled child. Disability insurance is an often-forgotten element in divorce but in the case of a disabled child it should be front and center in the settlement.
As an advisor, make sure to let your client know that all of these issues should be discussed and agreed upon with as much detail as possible at the time of settlement and not left to the future. As time goes on and priorities change, the parties are less likely to cooperate. Not to mention, changing or adding to the original agreement will result in additional legal costs and potentially significant discord. The more details you can agree to at the time of settlement, the better for all parties.
While the divorce settlement captures a moment in time, the ramifications of that settlement will last for the lifetime of both spouses and any perpetually dependent children.
Kathy Costas, a vice president, investment advisor and Certified Divorce Financial Analyst (CDFA) at EP Wealth Advisors in Westlake Village, Calif., specializes in working with men and women going through a divorce. She was appointed by the Institute for Divorce Financial Analysts as the chair of the Southern California chapter of the Divorce Alliance, a group for divorce professionals. Kathy is also the leader of the Conejo Divorce Resources Professionals group. She can be reached at [email protected] or 424-323-3852.