Divorce – what protection policy is right for me?

No one wants to think of Divorce, but if you do have to go through this there are so many issues to work through that people often overlook what protection you might need.  Arranging the right type of protection insurance can seem like a bit of a maze. If this is the first time you have considered it, you will hopefully find this a useful aid and point you in the right direction. Scroll down to read a real-life case study or to find out why Trusts are particularly important.* 

Do you need to cover Maintenance Payments?

If one party pays regular maintenance payments to their ex-spouse, their payments will inevitably cease should they pass away. A life insurance policy can be set up on a ‘Life of Another’ basis. This means that the payee is insured but the policy is legally owned by the ex-spouse. If the payee passes away, the policy proceeds are paid to the ex-spouse, thus replacing the maintenance payments.

These policies are usually set up as Family Income Benefit which means that the claim payment is issued in regular monthly payments. The Family Income Benefit better reflects the lost maintenance payments and is usually much cheaper to purchase than level term cover. Either the payee or the ex-spouse can be responsible for covering the monthly premiums. A point to note is that you must have the ex-spouses permission to take out the cover on their life. They might also be called to carry out a medical depending on the amount to be insured.

Do you have a marital home?

If so there are several scenarios, depending on your financial status. Will you have to sell the home and divide the equity? Will one move out and purchase another home, or if unaffordable, possibly rent or live with family or friends? Will you both stay in the same home until you can split the property?

Whatever your solution it is important to consider what would happen if either of you passed away or became ill.  Our team of expert advisers is here to provide you with impartial advice and ensure any recommendations match your specific requirements.

Case study and trusts

• Case study

  Mr and Mrs A, aged 40 and 42 are divorcing. They have a family home in which Mrs A is still living with their two children, aged 3 and 5 with a mortgage of £100,000. Mr is living with family and will rent a property once the divorce is through. They are both employed and although they have life cover through work, they only have statutory sick pay and their jobs are not guaranteed, meaning they could lose their life cover is they lost their jobs. Mr A is the main earner and will be paying maintenance of £500 per child until they each reach age 18. Mrs A only works part time as she has historically looked after the children.

  Their first instinct is to purchase life insurance including critical illness, so if either of them pass away the mortgage is paid off. We looked at a joint decreasing life insurance policy which reduces in line with a repayment mortgage, this would cost £46.37 per month to include critical illness or £9.14 without.

  It is also important for Mr A to consider protecting his income as he only gets 4 weeks sick pay from work. We looked at full income protection of £2,000 per month so he could still make the maintenance payment and also have a little left to live. This could be provided for a monthly premium of £85.08 or to keep the cost down he could reduce the cover to pay out for a maximum of 2 years which would reduce the cost to £24.04.

  Probably the most important policy, the bare minimum that should be considered is a family income benefit policy on each parent. If either should pass away the other parent would have an income until the children are independent (usually between the ages of 18 and 24). If both were to pass away, then both policies would pay out increasing the amount available to bring the children up and pay for schooling, trips or possibly things like their first car.

  For a policy that would pay out a monthly amount of £2,000 per person and which runs for 18 years, the cost would be £14.13 per month for Mr A and £16.02 per month for Mrs A.

  Prices are correct as of Dec 2018 Please note that the premiums provided are indicative only and based on this specific example, which is shown for information purposes only. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

• Arranging a Trust

  It is important to put your policy in a trust when taking out life insurance to offer financial security to dependent children.  We offer all of our clients assistance in placing their policies in trust.  There is no additional cost for this service.

  There is no legal requirement for the proceeds of a life insurance policy to be paid automatically to a divorced spouse.  The Rules of Intestacy are complex and we will be happy to assist with any queries.

  *Trusts are not regulated by the Financial Conduct Authority.