Using life insurance to secure support

It’s not uncommon for payors of support- whether it’s child support or spousal support– to have their support obligations secured by a life insurance policy. If the payor dies prematurely, the life insurance policy is available to satisfy the remaining balance of their support payments. A court can order that support be secured by way of a life insurance policy under the terms of the Family Law Act. But it’s also a common provision to include in a separation agreement.

The security of a life insurance policy becomes somewhat less secure if you consider the fact that a payor can change who benefits under their life insurance policy. While an order can require a payor to designate a beneficiary as an ‘irrevocable beneficiary’, the support recipient would need to make sure (prior to the payor’s death) that this irrevocable designation had, in fact, been made.

In Dagg v. Cameron Estate, the Court of Appeal considered a case where a husband changed the beneficiary designation on his life insurance a few days prior to his death. Contrary to the terms of a support order benefitting his first wife, he included all of his first wife, his second wife (and his children with his second wife) as beneficiaries under the policy. The husband’s estate was insolvent, so the insurance proceeds were the only funds available to satisfy everyone’s competing claims.

The first wife attempted to collect 100% of the insurance proceeds based on the husband’s breach of the court order requiring him to maintain her as an irrevocable beneficiary, and based upon her being a creditor of the estate under the terms of the Succession Law Reform Act.

The court found that the first wife should only be able to claim against the insurance proceeds up to the amount of the husband’s total support obligations to her. She was not entitled to a windfall. The balance of insurance proceeds were available to pay the husband’s second family.