Third-Party Beneficiaries, Part II — Insurance Policies
A few months back, we wrote an article on “Third-Party Beneficiaries: Do They Matter?”. We explained what a third-party beneficiary is, what situation might cause a third-party beneficiary to exist, and why you may want to prevent someone who isn’t signing your agreement to try to enforce your agreement later. We concluded by suggesting that you may want to prevent third-party beneficiaries from coming out of the woodwork EXCEPT in some circumstances.
But Wait…There’s More!
We left you with the thought that you might have a different answer about third-party beneficiaries if life insurance policies are involved where the life insurance proceeds are going to your ex but really intended to benefit someone else, for instance, your children. We’re here to pick up where we left off. Here’s the issue. Suppose your divorce agreement includes a requirement that you obtain life insurance and that your soon-to-be-ex will be the recipient of the proceeds for the sole purpose of taking care of your children including, let’s say, paying for their higher education. And let’s suppose further that your ex concludes after your death that the best way to fully educate your children is the children have a parent who is well-traveled. The solution, your ex decides, is to use the insurance money to travel around the world a few dozen times!
When you’re thinking about this sad scenario, you’ll have to keep in mind that you’re not “of this world” any longer so if there’s someone to stop the travels around the world by your ex, it won’t be you. (We’re avoiding the obvious bad puns about trying to get your ex to book on “Spirit Airlines” so maybe you can let your thoughts about this travel be known. Aren’t you glad we didn’t go there?) If your ex misuses the proceeds and there are no third-party beneficiaries, there’s no one who can enforce the ex’s obligations. Unless you make your children third-party beneficiaries of the insurance provisions.
Now you have two choices to consider, neither of which may be great:
1) Do you trust that your ex will take care of the children? Your ex is, after all, still the parent of your children and you are relying on your ex to “do the right thing.” If you end up going with the trust approach, then you may end up precluding ALL third-party beneficiaries. No exceptions.
2) If do you decide that your children can be third-party beneficiaries of the insurance provisions? Do you give your children encouragement to sue your ex?
There are some strong arguments against giving children the right to sue parents. One of the strongest is that it creates the potential for a great deal of animosity. In your absence, you may very well want the children and the surviving parent to get along. Also, some will argue that it creates an untenable situation for your child when you give your child the choice, even the possibility, of suing a parent. Many divorcing parents will resolve this by selecting what they believe is the lesser of the two evils: trusting the ex to behave rather than giving the children a tool to use against the ex.
Never Legal Advice
As always, at Resolution Point, we cannot provide legal advice. Please consult your lawyer as to what your choices are about third-party beneficiaries and what might be the most appropriate for your situation.