Protecting your divorce
Most of us know a friend or family member, or maybe even yourself have sadly gone through a divorce.
Life insurance policies may well be a low priority when there is so much to sort out after a separation. However, it’s vitally important that thought is given to protecting your family, particularly if young children are involved.
Financial settlements in divorce tend to focus on property, pensions and savings, 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 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.
Why is life insurance important after divorce?
It ensures children’s financial security.it can cover future needs like college, tuition, healthcare and general upbringing costs.
It can protect shared debts and assets. Divorce doesn’t always or indeed immediately erase joint debts such as mortgage, loans or credit cards.
Fulfil divorce agreement requirements. Courts sometimes mandate life insurance as part of the divorce decree.
Provides peace of mind. Ensures that despite the separation your loved ones won’t face financial instability if something unexpected happened.
What happens to your existing policy after divorce
This very much depends on how your life cover is set up.
Individual Life Assurance Policies
- If you have an individual (single) policy, divorce does not automatically change or cancel it. The policy remains valid as long as premiums are paid and terms are met.
- The most important action is to review and, if needed, update your beneficiary. Many people name their spouse as beneficiary; after divorce, you may wish to change this to a child, relative, or someone else. This is usually done by contacting your insurer and completing a change of beneficiary form.
- If your policy is written in trust, changing the beneficiary may be more complex and could require trustee agreement.
Joint Life Assurance Policies
Joint policies are common for couples, especially to cover mortgages. After divorce, these policies do not automatically split or end.
Options include:
- Splitting the policy: Some insurers allow a joint policy to be split into two single policies, often under a “separation benefit” clause. This usually must be done soon after the divorce and may have conditions (e.g.. both parties must agree, and the new policies must have the same terms as the original).
- Cancelling the policy: If splitting isn’t possible, you may need to cancel the joint policy and each take out new individual cover. Be aware that new policies may be more expensive due to age or health changes, and you may need to undergo new medical checks.
- One partner takes over: In some cases, one person can take over the policy, but this depends on the insurer.
Legal and Financial Considerations
- Courts may require life assurance as part of a divorce settlement, especially where maintenance or child support is involved. The policy may need to be maintained for the benefit of children or an ex-spouse.
- If your ex-partner is a trustee or named beneficiary in a trust, they may still be able to claim on the policy unless you update the trust or beneficiary details.
Practical Steps
- Contact your insurer to discuss your options and any separation benefits available.
- Update your will to ensure it aligns with your new wishes, as your will governs the distribution of your estate.
- Review your cover to ensure it still meets your needs post-divorce, especially if your financial responsibilities or dependents have changed.
- Maintenance agreements and child support are often protected by life assurance, and courts may mandate this as part of the settlement.
Do you tell your insurer you’re divorcing
Whilst it is not imperative that you tell your insurer you are divorcing, if you have a joint life insurance policy it’s very important to review this during or after divorce. Some couple will continue joint policies, (especially if children are involved,) but others separate or reassign them as part of financial settlements. It is also important to update your beneficiary or trust details to ensure any benefits do not go to an ex-spouse/partner unintentionally.
Protecting maintenance payments with life insurance
After the legal process of the divorce is complete and maintenance agreements are in place, protecting these maintenance payments is important. Paying maintenance can be a significant commitment over many years, often lasting until a child finishes higher education. Without protection in place should you experience a serious illness or pass away unexpectedly the maintenance payments would likely stop.
Family Income Benefit (FIB)
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’s 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.
FIB will provide peace of mind that maintenance payments can continue if death or critical illness occurs and can offer some comfort in such a challenging life event.
Who should your new life insurance beneficiary be
Your new life beneficiary should be someone who matters most to you, such as your children or close relatives. Choosing the right person ensures your benefits are directed according to your wishes and provides financial security for loved ones. It’s equally important to update your will to reflect this change, as your will is the legal document that governs how your estate is distributed. Keeping both your beneficiary nomination and will aligned avoids confusion and ensures your intentions are honoured.
