When you divorce, the responsibility for paying for your lifestyle rests solely with you. I’m sure that you know that. It sounds a bit stark, but it is important, if you haven’t thought about it, that you do. So, what is financial protection and why do I need it?
Financial protection, like any form of protection, helps reduce the impact when things go wrong. It can help to reduce your fears of things going wrong because you know at least how you will financially cope if they do.
So, let’s take a look at what you might worry about and what protection might help.
How will I pay the bills if I can’t work?
If you can’t work because of illness, you make get some sick pay from your employer. For example, if you work in the NHS, for a local authority or in education, you will be paid 6 months full pay and 6 months half pay. Some private and public companies also offer sick pay benefits or even a group protection policy that you may be a member of. You should begin by checking what your employer will provide.
If not, you will be entitled to statutory sick pay, which is £95.85 per week for up to 28 weeks. This is unlikely to be sufficient to pay your household bills and so you should think about how you should manage. There are a number of options available, such as Income Protection, Critical Illness Cover and Family Income Benefit. Each of these plans offers a different type and structure of benefits.
- Income Protection will pay a monthly benefit after a set amount of time (deferred period), such as 4, 12, 26 or 52 weeks. Short term policies are available or those that pay to retirement. You can also have the benefits increasing with inflation so that you continue to earn an equivalent amount.
- Critical Illness Cover is usually paid as a lump sum if you are diagnosed with one of a list of specified illnesses. There is no deferred period, but you will not be covered if the reason for you being unable to work is not on the list. There are providers who offer a basic list and a comprehensive list.
- Family Income Benefit is a form of Critical Illness Cover. Rather than receiving a lump sum, you will receive a monthly benefit to the end of the policy term. As with Income Protection, this could be taken to retirement and could increase with inflation. However, unlike Income Protection, because it is a type of Critical Illness Cover, the illness stopping you from working must be one of those on the list.
If you are paying maintenance, you will be expected to continue to pay, unless a court varies the order, which would require you to go to court. I would suggest that you take out protection so that you can continue to pay, even if you can’t work. If you receive maintenance from your ex and you are ill, this will continue, as will any statutory benefits. However, I would ensure that they have protection in place so that they will continue to pay if they are ill.
What if I (or my ex) die when maintenance payments should continue to be due?
If you are in receipt of, or paying, maintenance payments, I would strongly recommend that either you or your ex take a life assurance or family income benefit policy out. If you are in receipt of maintenance and know that your ex does not have cover, I would suggest that you take protection so that you are clear that the payments will continue. You can do so as you have an “insurable interest”, which means a reason for taking insurance based on their death.
- Life insurance is a lump sum payment, payable to another person or a trust on your death. It can be increased with inflation if required.
- Family Income Benefit is a monthly payment, rather than a lump sum but works like the above.
To discuss which is best for you and what the cost will be, you need to seek advice from a professional (please drop me an email to Tamsin@smartdivorce.co.uk if you would like my help in this area).