South Carolina’s bass-ackwards approach to life insurance to secure support payments

South Carolina’s approach to the requirement of life insurance to secure child support or alimony payments could only have been designed by someone with no appreciation for economics.  Through its structure of perverse incentives, we have created a system that generates unneeded controversy, misallocates the cost of this insurance, and practically guarantees an inefficient level of such insurance purchases.  The only folks who could applaud this system are the attorneys who incur fees from the needless litigation.

Law and economics (or the economic analysis of law) is a legal theory that applies methods of economics to law.  This approach, whose most famous judicial advocate is Richard Posner of the U.S. Court of Appeals for the Seventh Circuit, makes policy recommendations based on the economic consequences of various policies. The key concept for normative economic analysis is efficiency, in particular, allocative efficiency.  As of former economics major in college, I enjoyed studying this theory in law school and have previously noted the law’s failure to efficiently allocate costs in relocation cases: See Economic Analysis of Relocation Cases.

The problem with South Carolina’s current approach to using life insurance to secure child support or alimony payments is that it misaligns incentives by making the person who pays for the insurance and the person who desires and benefits from the insurance be on the opposite sides of each case.  From the standpoint of the support payor, the amount of insurance that should be purchased is $0.00: the insurance confers no benefit on the payor so why should he or she want to purchase any?  From the standpoint of the support recipient, the amount of insurance that should be purchased is a kajillion dollars (or as much as the nice family court judge will order): if the other side’s paying for it, get as much as you can.

Life insurance is not like child support or alimony, in which every dollar out of one party’s pocket is a dollar in the other party’s pocket. Instead, there is an economically efficient amount of insurance that should be purchased in every case to secure support payments. Unfortunately the system, as designed, almost guarantees that this isn’t the amount purchased.  Instead the family court typically either doesn’t order life insurance or orders life insurance, with the policy to be paid for by the person who doesn’t want it for the benefit of the person who does, without any attempt to figure the optimal amount that balances cost and benefit.

I assume that in each situation there’s an optimal level of life insurance to secure alimony and child support payments but it’s the recipient, not the payor, who knows that amount.  It’s the recipient, not the payor, who will be supporting him or herself, or the parties’ children, without contribution from the payor should the payor die.  The recipient knows how much risk he or she feels comfortable living with–the risk of having to support oneself without alimony and the risk of having to support the children on one income–and how much he or she is willing to pay to alleviate that risk.  Even with the same payor, one support recipient might feel that insurance to maintain the ordered support level for two years is sufficient and another support recipient might feel more comfortable with insurance that covers support for forty years.  With the same monthly support levels and the same payor (insurance premiums are dependant upon the payor’s age, gender, health, policy term and other factors), the premium cost for the former recipient will be substantially lower than the premium for the latter.  However, if the court allocates premium costs to the payor, both recipients have no reason to tailor their life insurance requests to their comfort level for risk; instead the law encourages them to seek as much insurance as possible but leaves them financially exposed if their request for life insurance is denied.

Further consider the situation in which one payor is young and healthy while another payor is older or reckless.  A recipient receiving support from these payors will be more inclined to obtain insurance for the older payor’s or reckless payor’s obligation but less concerned about having insurance on the younger and healthier payor’s life.  However the premiums on the older or reckless payor will be higher than for younger, healthier payor.  Of course, if the recipient can make the payor pay for this insurance there’s no need for the recipient to weigh these risks and costs: he or she can simply demand as much insurance as possible and hope that the court requires it.  A more rational system would require the recipient to pay for this insurance.

Were I a family court judge I would never order the payor to provide life insurance (unless it was already being provided through the payor’s employment).  Instead I would simply require the payor to cooperate with the support recipient in the recipient’s purchase of insurance on the payor’s life.  In circumstances in which I believed the payor’s behavior justified him or her incurring some expense for this insurance (perhaps the payor chooses to live a particularly risky lifestyle) I would simply increase the payor’s alimony or child support obligation by some set amount and allow the recipient to chose whether to use these extra funds to purchase insurance, keep the funds and forgo insurance (essentially self-insure), or obtain even more insurance than I might believe desirable if that recipient has a lower tolerance for risk.  At least these decisions would align the incentives to purchase insurance with the cost of insurance.  As the law now stands, too much life insurance (from an efficiency standpoint) is often purchased when the court requires it and too little insurance is purchased when the court doesn’t.

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  • Greg, this is a good example of a theoretical issue. As a practical matter, I have never had a judge require my client to maintain life insurance when we opposed it.

    Why is the requirement for life insurcance not unconstitutional as a denial of equal protection for the same reasons stated in Webb v. Sowell, 387 S.C. 328, 692 S.E.2d 543 (2010)? Spouses cannot be required to maintain insurance on themselves or each other while they are married nor can they be required to maintain insurance for their children so long as they reside together. The filing of marital litigation should not be a basis to require an obligation that did not exist during the marriage.

    • Thomas,

      I too have never, in my recollection, had a judge require life insurance. However I have to defend these claims a few times a year. Twice in the past month I have filed answers raising a Rule 12(b)(6), SCRPC defense to the life insurance request because no special circumstance was plead. Still my perception is that some attorneys reflexively seek life insurance expenses and I am required to defend these requests. I make a bit more money but it does nothing to help our clients.

      When my clients want insurance, I suggest they pay for it and seek an order requiring the other party to cooperate in obtaining the insurance. I’ve had no fights on that issue and the court has never denied this request.

  • Roy Stuckey

    Thomas, you are one of my favorite lawyers, but I disagree with you slightly here. There is a difference between the motivations for a married man to purchase life insurance to protect his wife, and a divorced man to purchase life insurance for his former wife.

    It would be an unusual case when a family court judge should order a spouse to maintain life insurance to secure alimony or child support, but I agree with the Supreme Court that it calls for “special circumstances” not a “compelling reason.”

    I do agree that the supported spouse should consider purchasing life insurance on the ex-spouse with her own money, either to secure alimony or child support. I wonder how many do.

  • ML Ramsdale

    I also think that a simple – although not necessarily enough – way to address the life insurance to cover child support argument is the availability of social security for a parent’s children (if the deceased party has paid enough into the system during his/her life time).

  • I certainly agree with the social security argument as regards the minor children. I have in the last several years had about 6 clients agree to take over ownership of an existing term policy or existing whole life policy with little or no cash value. The client has agreed to pay the premium and by being the owner, can designate the beneficiary. In some cases, the insured had become uninsurable since the inception of the policy. In cases where no insurance, have gotten other side to agree that party would fully cooperate, including physical exam, with other party again owning policy and paying premium.

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