We should all take time to review our financial protection arrangements regularly. As a married couple, you are likely to have taken some life insurance to repay the mortgage if one of you dies at the very minimum. You may have some life insurance and critical illness cover over and above this but is this financial protection still relevant to you when you divorce?
Let’s begin by looking at how different types of protection work:
Level Term Assurance will provide a tax free lump sum on your death for a specified number of years. The lump sum is often used to repay a mortgage or provide cash for your next of kin to look after your children.
Decreasing Term Assurance works the same but the amount of lump sum paid out decreases each year, so they are usually used for repayment mortgages. The monthly cost of these plans is lower than term assurance because the amount of cover reduces.
Critical Illness Cover is usually added to life insurance and can be level or decreasing, as above. Again, it is a lump sum payment. The payment is made on diagnosis of one of a number of illnesses, which differ from one provider to another.
Family Income Benefit is a slightly different type of life insurance. It provides a certain amount each year for a limited term. For example, you might wish to ensure there is £20,000 each year in trust for your children until they are 21. The total amount of cover needed decreases by £20,000 each year and so again this is lower cost than a level term assurance policy.
Income Protection provides a replacement to your salary in the event that you can’t work due to an accident or serious illness. You choose the length of time that you would need to be unable to work before it begins to pay; for example, you might choose a deferred period of 6 months, if you have 6 months sick pay at work. The payments are usually made monthly, as your salary would be, but they are tax free as long as you have paid the premiums personally out of taxed income.
What do I need?
This is where things can get complicated. It depends on your personal circumstances. You might be in a position where you don’t need any financial protection because you have sufficient savings, investments and pensions to cover you and your family through all eventualities. On divorce, your priority may shift to ensuring that your income is protected, rather than proving a lump sum on your death.
You are likely to need a combination of protection but aren’t sure what to prioritise. If you are paying maintenance or receiving maintenance under a financial settlement, it would be a good idea to protect these amounts to ensure that your financial obligations can be met.
At this stage, you probably need to enlist the help of a financial planner, who can help you work out what you need, how much it will cost and how to prioritise. If you would like more information, please contact me at Tamsin@smartdivorce.co.uk or on 07975 922766.