‘Protecting yourself against the impact of divorce’ by Holly Hill published in ThoughtLeaders4 HNW Divorce Magazine

UK divorce statistics reveal that approximately 42% of marriages are currently ending in divorce. The Divorce, Dissolution and Separation Act 2020 allows couples to legally end their relationship without attributing any blame, thus hopefully reducing the likelihood of conflict. However, divorce proceedings continue to remain expensive, time consuming and complicated, and amongst these complications are some life insurance issues which ought to be considered.

 

Aspects to consider…

 

Joint-life policies for IHT

Where a divorcing couple have an existing joint-life policy, unless there is a ‘separation clause’ or a ‘carve-out’ option included, the policy cannot be divided. As a result any pay-out is unlikely to match the timing of when funds are required to pay a tax liability. Post separation, inheritance tax will arise on each death individually (depending on the capital eventually held by each party) and insurance covers need to be restructured to reflect this. Any existing joint-life policies will be rendered unfit for purpose and will need re-broking into two separate single-life policies.

When advising married clients in the future, advisers should be seeking out polices that have this separation flexibility built in, allowing divorcees to restructure their cover without the need for further medical underwriting.

 

New spouses

If there is a likelihood of a re-marriage in the near future, clients may want to consider taking out a 2-3 year term assurance on a single life basis, before replacing the cover with a new joint-life policy. Some clients may wish to take the opportunity, while unmarried, to secure single-life cover for the longer term. This will protect them from any future changes to their circumstances, although the downside is that single life cover is typically more expensive than joint-life cover.

 

Maintenance payments

Typically, one party will be ordered to pay maintenance payments to the other following divorce. This may just continue until the children reach 18, or could continue throughout life. Maintenance for children may also cover school fees. In the event of the death of the ordered party, the maintenance will cease and although there may be a claim against the deceased’s estate this is likely to take a significant amount of time to finalise. In the meantime the surviving ex-partner and children are likely to have significant loss of liquidity.

 

It is possible to structure a life insurance policy to match future maintenance payments in a very cost-effective way. For example, maintenance payments of £100,000 a year for 10 years on the life of a 40 year old, non-smoker, would cost just £340 per year. These policies are also very simple to financially underwrite using the court order alone, although a medical would still be required.

These policies can be structured such that the dependant spouse owns the policy at outset on a ‘life of another basis’ giving them oversight and control of the policy to ensure that it remains in force.

 

Protecting new families

Post divorce everyone needs to review their protection needs. Often capital has been seriously depleted and there can be significant debt. Clients need to consider their family and debt protection requirements and, if cash flow is an issue, it may be worth putting up a very inexpensive protection umbrella which will last for five years.

In addition, both parties need to consider if they should be buying a critical illness contract, which provides a lump sum on diagnosis of certain illnesses (predominantly for heart and cancer related issues). They should also be reviewing their income protection cover to ensure that, should they be unable to work, their income will be replaced and the maintenance payments will continue.

 

Author: Holly Hill, Associate Director at John Lamb Hill Oldridge

Article published in ThoughtLeaders4 HNW Divorce Magazine, September 2024