A Practice Guide for Family Law Attorneys

Introduction

Family law practitioners routinely address life insurance as a mechanism for securing alimony and child support obligations. Disability insurance, however, is far less commonly addressed in Divorce Settlement Agreements, even though a payor is statistically much more likely to become disabled from injury or illness during their working years than to die. This gap creates significant financial exposure for support recipients. This article examines why disability insurance belongs in the divorce practitioner's toolkit, how it differs from life insurance in the divorce context, and what practitioners should consider when advising clients on this issue.

Part I: Why Disability Is the Greater Near-Term Risk

The Statistical Reality

Most practitioners instinctively focus on life insurance when securing support obligations. The reasoning is straightforward: if the payor dies, support stops. But the probability of a working-age adult becoming disabled is substantially higher than the probability of dying during the same period. According to the Social Security Administration, one in four workers will face an accident or illness during their lifetime that will keep them out of work for one year or longer. For payors in their 40s and 50s, a common demographic in higher-income divorces, the risk of a disabling illness or injury is a present and material concern, not a remote one.

Yet in most Divorce Settlement Agreements, disability insurance is either absent entirely or addressed only in passing. The result is that a support recipient may be well-protected if the payor dies, but completely unprotected if the payor suffers a stroke, cancer diagnosis, serious accident, or other disabling conditions that prevent them from working.

What Happens When the Payor Becomes Disabled

When a payor's income drops sharply or disappears completely due to disability, the support recipient faces two immediate problems.

First, the payor may fall behind on support payments simply because the money is no longer there. A court order cannot create income that doesn't exist.

Second, the payor may seek a modification of support based on their reduced income or lack thereof. Courts in most jurisdictions will consider a substantial, involuntary change in the payor's financial circumstances as potential grounds for modification. Depending on the severity and duration of the disability, a court may reduce or suspend alimony and/or child support while the payor is unable to work at their prior income level. Even a well-drafted Divorce Settlement Agreement cannot compel payments from income that no longer exists.

The support recipient who was counting on those payments to cover housing, living expenses, and children's needs may find themselves with little or no recourse.

Part II: How Disability Insurance Works in the Divorce Context

The Basic Mechanics

Disability insurance replaces a portion of the insured's income if they become unable to work due to illness or injury. Private long-term disability insurance can typically replace 50-70% of the payor's gross income for two or more years, until either the disability ends and the payor can return to work, or until retirement age (up to age 70 in some policies). In addition, if the premiums are paid with after-tax money, the disability insurance payouts will be tax-free.

There are two primary categories practitioners should understand:

Short-term disability insurance typically provides benefits for a period of three to six months following the onset of disability. It is designed to cover temporary conditions and is often employer-provided.

Private long-term disability insurance provides benefits for an extended period, typically from two years to age 65 or longer. For purposes of securing alimony and child support payments, private long-term disability coverage is the more relevant product, since short-term coverage may be exhausted before a modification proceeding is even initiated. Additionally, the disability insurance needs to remain in place until the last financial obligation of the payor to the recipient has been fulfilled.

Why Employer-Sponsored Group Disability Insurance Is Insufficient

Practitioners should not assume that a payor's employer-provided group disability coverage will protect the support recipient's interests. Even where group coverage exists, it is almost always insufficient for several reasons:

• Portability: Group disability insurance is typically not portable. If the payor leaves their employer, voluntarily or otherwise, the coverage will end and the support recipient will lose the protection entirely.
• Income base: Most group plans cover approximately 60% of base salary only. Bonuses, commissions, and other compensation are commonly excluded, which can significantly understate the payor's actual income and the resulting benefit.
• Definition of disability: Group plans typically use an "any occupation" definition of disability. This means benefits are only paid if the payor cannot perform any work at all, including minimum-wage employment. Under this standard, a surgeon whose hands are injured in an accident would probably be denied benefits because they can work at a different, lower-paying job. This definition provides much weaker protection than the "own occupation" standard available in private policies (discussed below).
• Tax treatment: If the employer pays the group disability premium, or if the payor pays premiums with pre-tax dollars, the disability benefits received are taxable income to the payor. This further reduces the net amount available to fund support payments.
• Elimination periods: Group plans often carry longer elimination periods, typically 90 days before benefits begin. During that waiting period, the payor may have no income from which to make support payments.

The Definition of Disability: Why It Matters

The single most important feature of any private disability policy is the definition of disability. Practitioners should be keenly aware of this distinction and ensure it is addressed when advising clients on what to require.

The recommended standard is an own-occupation definition. Under this standard, total disability is defined as the inability to perform the material and substantial duties of the insured's own specific occupation. For example, a surgeon who can no longer perform surgery due to a hand injury would qualify for benefits even if they could theoretically teach at a medical school or take on other high-paying work. The insured's own occupation, not their theoretical employability, is the benchmark.

By contrast, an any-occupation definition, typical in group plans, requires that the insured be unable to perform any work at all. Under this standard, the same surgeon's claim would probably be denied, because they retain the ability to earn income at some other type of job, even if it’s at a fraction of their prior earnings.

For support recipients, that difference is critically important. An any-occupation policy might pay absolutely nothing exactly when the payor's income has dropped most sharply.

Private policies may also include a partial disability provision, which can provide benefits even when the payor's illness or injury permits them to work limited hours in their own occupation. This is worth considering in cases where the payor's income is likely to be reduced rather than eliminated entirely.

The Insurable Interest Requirement

As with life insurance, disability insurance requires a documented insurable interest. In the context of divorce, the same financial obligations that support insurable interest for life insurance—such as alimony, child support, and other continuing financial obligations—also support insurable interest for disability coverage.

Policy Ownership

Unlike life insurance, most disability insurance policies require the insured to be both the owner and beneficiary. However, a limited number of top-rated carriers will permit the support recipient to both own and be the beneficiary of a disability policy on the insured payor. This structure, if available, provides the same control advantages as the recipient ownership of a life insurance policy, where the recipient pays the premiums, is the beneficiary, and is not dependent on the payor to keep the coverage in force.

Since recipient ownership of a disability policy is less commonly available, it is particularly important to obtain this coverage during the divorce process, before the divorce is finalized, and all the policy details must be included in the Divorce Settlement Agreement.

Underwriting Considerations and Cost

Disability insurance underwriting evaluates the payor's health history, occupation, income, and any existing coverage. Pre-existing conditions may result in exclusions or denial. Depending on the insurance carrier, medical examinations are often waived for benefit amounts below $6,000 per month.

Private long-term disability insurance is relatively affordable given the protection it provides. Premiums typically range from approximately 1% to 3% of the insured's annual income, depending on policy features, the insured's health, and other factors.

An important tax consideration, which was mentioned earlier in this article, is if premiums are paid with after-tax dollars, the disability benefits received are generally tax-free under current law. This can make the net benefit amount more comparable to the payor's previous after-tax income, an extremely important factor when assessing whether coverage can actually fund all the support obligations.

For W-2 employees, most private policies cover approximately 60% of gross pay and can include bonuses, commissions, and other compensation as reported on the prior year's tax return. Business owners can generally qualify for coverage based on 60% of their income as reported on their prior year's tax return.

Due to these complexities, the cooperation and timing issues that apply to life insurance are even more pronounced for disability coverage. Obtaining disability insurance during the divorce process, while the payor is still cooperating and before the Divorce Settlement Agreement is finalized, is strongly advised.

Part III: Structuring Disability Protection in the Divorce Settlement Agreement

What Practitioners Should Consider Addressing

The Divorce Settlement Agreement should address disability insurance with the same specificity applied to life insurance. Provisions worth considering include:

• Whether the payor is required to maintain individual private long-term disability insurance, and if so, the minimum monthly benefit amount needed
• The definition of disability is a critically important requirement. Practitioners must specify an own-occupation definition to ensure the coverage provides meaningful protection. In addition, including a partial disability provision in the policy should be seriously considered
• The elimination period (the waiting period before benefits begin, typically 30, 60, or 90 days) and how that period interacts with the payor's obligations and ability to continue support payments during a short-term disability (the shorter the elimination period, the more expensive the premiums will be)
• The benefit period (how long benefits will be paid) and whether it is sufficient to cover all support obligations through the last obligation’s end date. Remember, once all the payor’s obligations have ended, the recipient beneficiary will no longer have an insurable interest
• Who pays the premiums, and what proof of coverage the payor must provide annually if the policy is owned by the payor
• Whether recipient ownership of the policy is available and, if so, whether to require it

The Interaction Between Disability Benefits and Support Obligations

Practitioners should also consider how disability benefit payments interact with the payor's support obligations. If the payor receives disability benefits, those benefits should be considered income for purposes of a modification proceeding. The agreement may benefit from addressing this issue explicitly, for example, by specifying that disability benefit payments are intended to fund, at least in part, the payor's ongoing support obligations.

When Disability Insurance Is Unavailable or Unaffordable

In some cases, disability insurance may not be obtainable due to the payor's health, occupation, or existing coverage or it may be available only at a cost that makes it impractical. In those situations, practitioners should consider alternative structures, such as a larger asset transfer to the support recipient, a reserve fund held in trust, or, in appropriate cases, a Single Premium Immediate Annuity that creates a guaranteed income stream for the recipient independent of the payor's continued ability to work.

Conclusion

Disability insurance should not be an afterthought in divorce. It is a primary risk that most Divorce Settlement Agreements fail to adequately address. Employer-sponsored group coverage, where it exists, is frequently insufficient, primarily because it is not portable, often excludes significant income, uses a very weak definition of disability, and its benefit payments are typically taxable. Private long-term disability insurance, structured with an own-occupation definition of total disability and obtained during the divorce process, provides a much greater level of protection. Practitioners who raise this issue during negotiations, confirm the payor's insurability before the agreement is signed, and address disability coverage with appropriate specificity in the settlement agreement provide a superior amount of post-divorce financial security for their clients.