Divorce can be an emotionally draining process with the fallout affecting separating spouses in a variety of ways.
When couples marry, they typically merge their respective lives and, in the event of divorce, the process of unravelling the two can be very complicated.
On 6 April 2022, the Divorce, Dissolution and Separation Act came into force, which has allowed couples to legally end their relationships without attributing any blame, in turn hopefully reducing the likelihood of conflict.
However, the Independent reports that the week following its enactment saw a surge of almost 50% in divorce applications. So, while divorce might have become smoother emotionally, more couples are engaging in proceedings that can be expensive, time-consuming and financially complicated.
One of the often-overlooked ways divorce can affect couples is through insurance complications. At John Lamb Hill Oldridge we offer expert advice on how to restructure your client’s policies as they manoeuvre through divorce proceedings.
These are our top three tips:
1. Understand the potential inheritance tax issues arising from separating joint-life policies
It is likely that, if your clients have taken out insurance during a marriage, they may have joint-life policies. This can be beneficial while they remain with their spouse but can cause complications during separation.
The primary issue is the loss of the inter-spousal exemption, which means that IHT will be due on each death individually. Consequently, the timing of any pay-out from their joint-life policy would become misaligned with timing of their individual liability to inheritance tax arising.
Unless the clients initially opted for a specific clause known as a “separation benefit” or “carve-out” option in their joint-life policy, their cover will not be eligible for a simple division and both spouses would need to take out new, single life cover.
If your clients worked with the right financial advisers initially, they will likely have been guided to seek out policies that had a carve-out flexibility built in, allowing a simplified restructuring of cover upon divorce.
If not, it is important for them to receive guidance from an adviser who can help them take the right next steps in order to protect their and their former partner’s estates from IHT exposure.
2. Protect them from future family restructuring by taking out single-life cover while they are unmarried
After your client has gone through divorce proceedings, it is natural for them to reflect on their new life and their new needs as a single person. They are no longer making decisions as a partnership and so will likely have very different aims, not least because divorce can be a lesson in the instability of relationships and can put an added emphasis on individual long-term planning.
Opting to secure single-life cover during a period where a client is unmarried can protect them from any future changes to their circumstances.
Single life cover will not need to be replaced if the client later remarries as the terms of insurance are written based on the situation solely at policy inception. It should be noted however, that single-life cover is typically more expensive than joint-life cover.
If the client later decides to remarry, the single life cover could of course be cancelled and replaced with a likely cheaper joint-life contract, but in the interim, the client has individual security for the long term which they could choose to keep as personal protection even in the event of remarriage.
3. Provide for their family post-divorce with the security provided by insurance
Divorce can be a messy situation for a variety of reasons, but one of the most damaging consequences can be its effects on your client’s family.
If your client has children with their former partner, they will want to ensure they are protected and provided for in their family’s new post-divorce reality.
This can cover a range of factors such as debt protection, medical issues, inheritance, and maintenance payments.
Consider our client, a 52-year-old, UK-based, divorcee with two children from his previous marriage. He is a non-smoker, albeit with some health issues.
As part of his divorce agreement, the client agreed to make maintenance payments of £9,250 a month to provide for his family over the next 13 years (until his youngest child finished education). This was broken down into:
- £4,250 each month to his ex-wife
- £3,000 each month towards mortgage payments
- £2,000 each month for his children’s school fees.
This represented a significant financial commitment and so our client wanted to ensure that, if he were to die unexpectedly, his children and ex-wife would be cared for and there would be no claim against his estate.
Our solution involved recommending a family income benefit policy on a single-life basis, that would cover the full £9,250 liability per month, with a monthly premium of just £115.
This would give him the peace of mind that his ex-wife and children would receive regular financial support at the same level as the maintenance payments should anything happen.
Post-divorce all parties needs to review their protection needs as capital has often been seriously depleted and both clients may be facing significant debts.
Clients need to consider all the ways their family may be financially affected by the separation such as possible cash flow issues or sudden illness that could impair one party’s ability to provide.
Consulting a financial adviser can provide them with the emotional benefits of professional reassurance and can help guide them to the right options for their and their family’s needs.
Get in touch
If your client is currently going through divorce proceedings or believes that they might be in the near future, and have concerns about insurance implications, they should seek professional advice.
The first step is contacting us at [email protected] or by calling 020 7633 2222.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.