AD - GUEST POST | Around the world the COVID-19 pandemic has had a devastating impact on economies but more importantly families and loved ones. This has resulted in an increase in life insurance applications, as people seek to secure their loved one’s financial stability, whatever the future may hold.
Unfortunately, the emotional stresses and strains of COVID have also contributed to a surge in divorce rates. According, to an article in the Independent¹, UK law firms have experienced a 95% year-on-year increase in divorce-related enquiries. Whilst the BBC² have reported a 34% rise in the sales of basic divorce agreements in the US. In this article we seek to answer the key questions on how divorce impacts life insurance in a post-COVID world?
Joint life insurance after a divorce
In the UK it is estimated that approximately 40% of life insurance policies are joint³. This often makes financial sense as joint cover can be up to 35% cheaper compared with two single policies - after all you are likely to have committed to a joint mortgage, so why not life cover too. However, divorce can present a number of challenges, especially if the break-up is not amicable.
Is joint life insurance still valid after divorce?
Yes, as long as the monthly premium payments are maintained and you have not cancelled the policy, then cover will remain in place after a divorce. What’s more, there is no legal obligation to inform your insurer of your change in circumstances, although it can be a good idea.
Typically there are three common outcomes for a joint life policy after a break-up;
- One party takes over responsibility for the policy:You will need to come to an agreement with your ex-partner about who should take over the policy. The policy can then be signed over to them through a legal document. They will then take responsibility for the policy and will need to continue making the monthly payments. It is important to understand that not all insurers offer this option, so you will need to check with your provider.
- The policy is cancelled and both parties’ secure new cover:Sometimes it is easier and more logical to simply cancel the joint policy and look to take our new cover. The new policy can then accommodate any changes in your financial obligations as a result of the divorce. One really important consideration is your age at the point of application. The older you are, the more expensive life insurance will be, because the risk you pose and the likelihood of a claim increases. So, if many years have passed since you took out the joint cover it will be more cost-effective to continue that policy, (if possible).
- Evoke a separation benefit:A separation benefit, sometimes referred to as the separation agreement is an option that is included on some joint policies. This option allows you to split the policy into two in the event of a divorce. When using the separation benefit it’s likely you may need to fill out a form for your insurer and you will also need to include evidence of your divorce.
Life insurance beneficiary after divorce
On a joint life insurance policy, it is likely that each party would have named each other as a beneficiary to help protect the family home, household bills and future living costs etc. However, if you have gone through a divorce, you may no longer want your ex-partner to be a named beneficiary from your policy. If you have decided to cancel the joint policy, this will not be a problem as you can take out new cover and name someone else to benefit from your pay out. However, if you have taken over the joint life insurance policy, you will need to contact your insurer who can provide you with information about the process of changing your beneficiary.
Is joint life insurance considered marital property?
No, fortunately a life insurance policy is not considered marital property. In the event of a divorce, you and your ex-partner will need to come to a mutual decision about what to do with the policy, otherwise it will simply stay in place until the term elapses.
Individual life insurance policy
If you and your ex-partner have your own individual life insurance policies, then nothing necessarily has to change after the divorce. Having two individual policies, although meaning you will need to pay two monthly premiums does offer double the coverage. It also is more future proof if the relationship does not stand the test of time. The policy still covers your life, and nothing necessarily needs to change, although you may want to change the beneficiary who benefits from the policy, as mentioned above.
TOP TIP - Write your life insurance in trust to avoid 40% inheritance tax
Whether you are in a relationship or not, writing your life insurance in trust can be a great idea that could save you thousands. By writing your life insurance in trust you sign over the rights of the policy to a trustee/s, much like the executor of a Will. They then administer the proceeds of the pay out on your behalf.
The key benefits are by doing this the proceeds of your life insurance avoid forming part of your estate and are therefore not subject to inheritance tax, (40% on anything exceeding £325,000). As a result of the pay out falling outside your estate your loved ones will also not have to wait for probate to be granted, meaning a faster pay-out.
That said, if you’ve written your life insurance in trust, but have gone through a divorce this may cause complications. If the policy was written into an absolute trust, it is unlikely you will be able to change the beneficiary on the policy, meaning your ex-spouse is still likely to benefit from your policy. If the policy was written in a flexible or discretionary trust, it’s likely you’ll be able to make the necessary changes to the policy to meet your changing needs.
How has COVID impacted life insurance?
Surprisingly, at the point of writing this article, the COVID-19 pandemic has not impacted life insurance all that much. The cost of premiums have not been inflated, insurers are still paying out on claims and you can still get accepted onto a policy. The main changes have been to the application process. Post pandemic you will now be asked specific COVID-related questions such as, have you ever tested positive for COVID and have you ever been required to self-isolate. Even if you currently have COVID your life insurance application is unlikely to be declined outright. It is much more likely that it will be postponed until you have made a complete recovery.
In summary
The last 18 months have been extremely challenging both mentally and emotionally for much of the population. However, having adequate life insurance in place at least means your loved ones will be provisioned for financially if you no longer around to provide. The cost of life insurance can vary wildly between different insurers, so it is always vital to compare multiple quotes. An effective way of doing this free of charge is to use a comparison website or an FCA regulated broker, such as Reassured/Life-insurance.
The key takeaways;
- Joint life insurance policies are approximately 25% cheaper compared with two single policies, but can present problems in the event of a divorce
- One half of the couple can take over the joint policy in the event of a break up, if you can come to an agreement
- Some policies have a separation benefit which allows you to split the policy
- Having your own individual policy is often a safer option, as it can stay with you even if the relationship breaks down
- Writing your life insurance in trust can help avoid 40% inheritance tax and probate, but he careful as to which type of trust you use (absolute or flexible)
- Joint life insurance is not considered marital property
- COVID-19 has not affected the life insurance sector all that much and it is still possible to secure affordable cover
Have you considered life insurance policies?
