Navigating Financial Protection and Divorce

Getting divorced is one of the most stressful life events you can experience. You need to consider living arrangements, splitting of assets, custody of children – and that’s before thinking about the emotional toll it can take.

With so many things on your mind, organising your protection arrangements is unlikely to be your highest priority.

But if the worst should happen, it’s important to ensure that your family will be financially secure.

Life Cover

You may have set up life cover when taking out a mortgage, or to protect your family when you had children.

These are the main points to consider when reviewing your life cover:

•          If you are selling your property, you should check if your existing mortgage protection policy is still suitable for your needs. You may both need additional cover if you are each buying a new home.

•          If you have a joint life policy, check the terms of your cover. It might be possible to assign this to one person or to split it into two individual policies. The alternative would be to arrange new cover appropriate for your needs and cancel the original joint plan.

•          Check the beneficiaries on your existing plans. You may wish to remove your ex-spouse or amend any trusts.

•          Consider how much life cover you need in your new situation. You might have more financial responsibilities, particularly if you are the main carer for any children, or if you are still supporting your family financially.

•          Alternatively, if you don’t have any dependent children or debts, you may want to think about whether you need life cover at all.

•          If you have a whole of life policy, this might have a surrender value which could be claimed. However, whole of life policies can be very useful for Inheritance Tax planning, so it’s worth seeking advice before cancelling.

While joint policies can remain in place if you wish, a clean break is often the best option, particularly if someone remarries or starts another family. 

Critical Illness

A critical illness policy would pay out a lump sum if you were diagnosed with a serious illness.

The main considerations on divorce are:

•          Is your critical illness cover linked to your life cover? If so, you might need to replace it if you are cancelling joint policies.

•          How comprehensive was your existing cover? A critical illness plan taken out 20 years ago might cover more conditions than a more modern policy.

•          How would you cope financially if you were seriously ill? You may need to increase your cover if you are now the sole earner in the household.

Income Protection

An income protection policy pays out a regular income if you have longer-term health problems and are unable to work.

Again, the income protection requirements for a married couple could be different from those of an individual. You will probably be more reliant on your own earnings.

Here are the points to consider when looking at income protection:

•          Do you have the maximum cover available? It may be worth increasing this if your salary is the only income in the household.

•          How long is the deferral period? If your plan would pay out after 6 months, for example, you will need to make sure you have enough savings to cover your expenses during that period.

•          How long does the cover last? Some income protection policies would pay out an income until you recovered or until you retired, whichever came first. Others would cover a shorter period, for example, five years.

•          Are your circumstances likely to change? Some income protection plans will allow you to increase your cover at a later date without further medical evidence. This can be useful if you receive a pay-rise or promotion.

•          Is the policy provided through your employer? If so, it may not be as comprehensive as a personal policy, and would end if you changed jobs. You might want to look into a personal policy to cover any gaps.

•          Remember that any benefits paid out from your income protection plans will be subject to an overall cap which is linked to your salary – you can’t double up on cover by taking out two plans. The income would either be reduced or one of the policies would not pay out.

Pensions and Death in Service Benefits

If you have a pension or death in service benefits, these would be paid out to your beneficiaries if you were to die.

You may have completed a death benefit nomination, in which case you will probably want to change it if your spouse was your chosen beneficiary.

If you haven’t completed one yet, it’s important to do this as soon as possible. The scheme trustees have discretion over how any death benefits should be paid out, and if there is no obvious recipient, such as a spouse, the benefits might not be paid out as you would wish unless you give the trustees some direction.

Your pensions may be divided as part of the divorce settlement, so it’s important to take this into account.

Wills, Trusts and Powers of Attorney

Getting divorced should also prompt you to review your legal affairs. For example:

•          Until your divorce is final, you will still be treated as legally married under the law. You should create a Will or re-visit your existing Will if you no longer want your ex-spouse to inherit.

•          If you already have a Will, divorce will change the terms. Your ex-spouse will be removed as beneficiary and executor unless you specify otherwise. If your spouse is your sole beneficiary, your estate will be treated as though you died ‘intestate’ (without a Will). Your assets would be distributed according to a strict order of priority, which might not be in line with your wishes.

•          You may wish to look at any existing Trusts and appoint alternative Trustees or beneficiaries in place of your ex-spouse.

•          If you lose capacity, a Power of Attorney allows you to appoint a trusted person to deal with your affairs and make important decisions. It would probably be appropriate to appoint someone other than your ex-spouse to act for you. You can alter your existing POA, or if you don’t have one, your legal adviser can help you set one up.

As with any major life change, the to-do list can seem endless. A financial adviser can help you to navigate the options at this difficult time.

Please don’t hesitate to contact a member of the team to find out more about financial planning and family protection.