Divorce rates appear to have stabilised somewhat in recent years, according to data from CP Law Associates, but it also indicates that may well be down to financial pressures rather than choice.
Financial settlements in divorce tend to focus on property, pensions, and savings, while protection policies don’t get a mention.
If couples are struggling to meet the costs of the divorce legal process, then it’s very likely, particularly for those families with children, that they would also struggle financially if one of them were to die or be unable to work through a serious illness.
This is even more important when one parent is financially reliant, wholly or partly, on maintenance payments.
Two areas of focus
In my view, there are two areas that need to be considered.
The first is the flexibility of existing family protection policies. They should be set up at outset in a way that each party can continue with their own cover in isolation should they separate.
Ownership of the policy is key, and depending on whether they are jointly or solely owned can make splitting policies easier in the future, should separation or divorce occur.
Second, once the legal process of divorce has been concluded and maintenance commitments have been agreed, it is important to look to protect these payments.
The wage earner who is paying maintenance, which is often a large commitment for many years until a child or children has finished higher education, should consider if these payments could continue if they were seriously ill or died prematurely.
A family income benefit (FIB) policy can provide an income should premature death or critical illness occur.
Rather than a lump sum, FIB pays a monthly amount until the end of the policy term and can exactly mirror the monthly maintenance commitment.
If there is more than one child, many policies offer a menu plan, where an individual policy can be set up for each child with a chosen end date to perhaps coincide with university graduation or when a young adult might be financially independent.
Ownership of the policy is up to the individuals and their circumstances. It can be on own life, or life of another.
Real world example
Here’s an example of how it might play out.
Mark and Jayne have two small children aged five and seven.
On divorce Mark has agreed, as the main wage earner, to pay £750 maintenance for each child until they reach age 21.
So, under a menu plan two policies could be taken out, with Mark as the life insured, each with a monthly income of £750, one over a term of 14 years and the other over 16 years to coincide with each child reaching age 21.
Mark could own the policy and either write it in trust or nominate Jayne as the beneficiary, or Jayne could take the policy out on Mark’s life, as she can demonstrate financial interest.
Many potential receivers of the benefit choose to own the policy as this gives them control and knowledge that the premiums are being paid.
FIB will provide peace of mind if death or critical illness occurs but, when building a protection portfolio, adding some income protection would give further cover if the policyholder needed to take time off work sick offering some comfort in challenging circumstances.
