COVID-19: Divorce rates and life insurance*

COVID-19: Divorce rates and life insurance*

The devastating impact of COVID-19, both here in the UK and globally, has led to an increase in life insurance sales as people seek to protect their loved one’s financial future during these uncertain times.

At the same time, according to recent research, the pandemic has also contributed to a significant increase in the UK divorce rate. Leading London lawyers Stewarts have experienced a 122% year on year increase in divorce enquires and this trend has been seen around the world.

The combination of these two UK trends has led to many questions being raised.

As a result, I asked leading life insurance broker Reassured to help answer some questions you may have regarding life insurance if you have recently been through a breakup.

The benefits of life insurance

Before we go any further, it’s worth highlighting what life insurance does and the key benefits.

Life insurance is simply financial protection for your loved ones if you are no longer around to provide. You make a payment each month for the duration of the policy term, known as the premium, and if you pass away a cash lump sum will paid to your beneficiaries.

The cost of life insurance starts from approximately 20p-a-day for £200,000 of cover. However, the greater the risk you pose to the insurer, the higher your premium will be.

For example, if you are 28, have no medical conditions and are a non-smoker, you will pay significantly less than if you are 60, are obese, have high blood pressure and smoke 60-a-day.

A life insurance pay out is commonly used to;

• Pay the mortgage (ensuring the family do not have to sell the family home)
• Meet family living costs
• Cover childcare expenses
• Cover funeral costs
• Leave an inheritance

There are a range of policy options available; decreasing term, level term, whole of life insurance – all of which can be taken out as either single policies or a combined joint policy.

But which option is best for you and why? What if you have a joint policy but have split up with your partner? Can you divide a joint policy?

Joint life insurance or 2 single policies?

If you want life insurance and are in a long-term relationship, there is the choice of either taking out two individual single policies or one joint policy.

The main benefit of a joint policy is that you only pay one monthly premium, whilst both lives are covered simultaneously. As a result, the cost of cover is around 25% cheaper compared with the cost of 2 single policies.

However, the main drawback is that a joint policy will only ever provide one pay out, usually on the first death. This leaves the surviving partner left without life insurance, at a time when they are older and thus cover is more experience.

Two single policies require you to pay two separate monthly premiums, so it is naturally more expensive. However, it can offer two separate pay outs, therefore double the coverage. This extra layer of protection may be particularly vital if you have young children who depend on you. Would one pay out suffice?

Another key benefit of taking out your own single life insurance policy is that it is yours and only yours. So, if your relationship breaks down your life is still protected and your loved ones covered, whatever the future may hold.

For these reasons, if budget allows, it is generally a good idea to take out separate single policies as opposed to a joint policy.

But when we get married many take out a life insurance policy without giving it too much thought – 40% of all policies are estimated to be joint. After all, you may share children together, a mortgage, family car and travel insurance etc.

But what happens to a joint life insurance policy after a divorce?….

What happens to a joint life insurance policy after a divorce?

Some people are confused as to whether a joint life insurance policy is even still valid after a divorce. The answer is, yes, it is.

Until such time as you choose to cancel the policy, it will remain in place until it expires.

You are not legally obligated to inform your provider of a divorce; however, it is often best to do so in order to establish what options are available to you.

Deciding what to do with your joint life cover after going through a divorce is completely up to you and your ex. How amicable the breakup was is also usually very influential on what happens next.

Generally speaking, there are two main options open to you, and one lesser known option:

1. You decide to cancel the policy (and find a new policy)

The most common option is simply to cancel the joint policy and move on with your lives.

Once cancelled, both you and your ex can take out new policies, policies which accommodate changes in your financial obligations as a result of the divorce.

When setting up your new policy you may want to rethink the beneficiaries who benefit from your life insurance, this may mean amending your Will too. Especially if you are now in a new relationship or even remarried.

2. One party takes over the policy

You will need to come to a mutual agreement with your ex about who will take over the policy, including the payment of monthly premiums.

The policy can then be signed over to the chosen party via a legal agreement.

They will then take sole responsibility of the policy and will need to continue making monthly premium payments.

However, not all insurers will offer this option, so you may want to check the details of your specific policy.

3. A separation benefit option

A separation benefit, sometimes known as a separation agreement, is a lesser-known option that is included on a small number of joint policies.

This feature enables you to split a joint policy into two separate policies in the event of a divorce.

When implementing a separation benefit you will need to fill out some documentation, proving your separation, and sent on to your insurer.

To establish if your policy offered this feature, check out the terms and conditions of your policy or contact your provider directly.

Alternative policies to life insurance

Good alternatives to life insurance are either family income benefit or income protection insurance.

In contrast to life insurance, which pays out a single large lump sum, family income benefit instead pays out a regular monthly tax-free income for the remainder of the policy term. This is a very affordable policy option and one which can help family’s with long-term budgeting, avoiding having to invest and handle a large sum, which can incur fees/tax.

Income protection insurance basically replaces your income if you lose your job or become too ill to work or suffer an injury. Payments last for the term of the policy, as defined using the application process. This type of protection seems particularly poignant at this difficult time for so many.

Sources:
https://www.bbc.com/worklife/article/20201203-why-the-pandemic-is-causing-spikes-in-break-ups-and-divorces
https://www.natlawreview.com/article/divorce-rates-and-covid-19

* This is a contributed post