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Life insurance after a divorce in 2021

The COVID-19 pandemic has had a devastating impact on both the UK economy but more importantly thousands of families up and down the country.

This has driven a significant increase in the number of people applying for life insurance, as they seek to secure their loved one’s financial future, whatever it may hold.

At the same time, the stresses and strains on individuals as a result of COVID-19 have also contributed to a surge in the divorce rate.

A recent article published in the Independent* stated that UK law firms have seen a 95% annual increase in divorce-related enquiries. And it is not just here in the UK either; the BBC** reported a 34% rise in the sale of basic divorce agreements within the US.

But what impact does a divorce have on your life insurance policy? In this article we explore all the key consideration to ensure you are fully informed…

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

It is estimated that around 40% of life insurance policies are taken out on a joint basis†. Having a joint policy can make financial sense as they are usually between 15% - 25% cheaper compared with paying for two separate policies.

However, going through a divorce can present some challenges if you have joint cover, especially if the break-up is not amicable.

Perhaps you may have questioned, is a joint life insurance valid after a divorce?

The answer is yes. As long as the monthly premiums are paid and you have not cancelled the policy, then cover will remain after a divorce. In fact, there is no legal obligation to even inform your insurer of your changing circumstances, although it can be a good idea to make them aware.

Generally speaking, there are 3 outcomes for a joint life policy after a divorce:
 

1. One person takes over the policy

You will need to come to an agreement with your ex-spouse regards who should take over responsibility for the policy. The policy can then be signed over to them through a legal document. They will then need to continue paying the monthly payments.

2. The policy is cancelled

On occasions it is simply easier to just cancel a joint policy and look to take out new cover. The new policy can then factor in your change in personal circumstances, for example you may have a new mortgage to consider.

Another really important consideration is your age, as the older you are, the more expensive life insurance will be. Therefore, if many years have passed since you took out the joint policy it could be significantly more cost-effective to continue that policy, if at all possible.

3. The separation benefit

A separation benefit or separation agreement, is an option that is included on a small number of joint policies. This feature enables you to split the policy into two in the event of a divorce.

When wishing to evoke the separation benefit it is likely you will need to fill out documentation from your insurer and you will also need to provide official evidence of your divorce.

Life insurance beneficiaries after a divorce

On a joint policy, it is likely that each party would have initially named each other as the main beneficiary to help cover the family home/mortgage debt, utility bills, future family living costs, funeral expenses etc.

However, after a divorce, you may no longer want your ex-spouse to be the named beneficiary of the policy. This is especially true if you have remarried or started a new relationship.

If you decide to cancel the joint policy, this will not pose a problem as you can take out a new policy and name someone else to benefit from the pay out.

However, if you have taken over responsibility for the joint policy, you may need to contact your provider who can help you with the process of changing your beneficiary/beneficiaries.

Is a joint life insurance considered marital property?

No, a life insurance policy is not considered marital property. After a divorce, you and your ex-spouse will need to come to a mutual agreement about what to do next, otherwise the policy will simply remain in place until the term expires, unless premium payments are not kept up.

A single life insurance policy If you and your ex-spouse have your own single life insurance policies, then nothing necessarily has to change after a break-up.

Having two individual policies in place, although meaning you will need to pay two separate monthly premiums, does offer double the cover protection – this could be vital if you have young children to provision for.

The policy still covers your life, although as mentioned earlier, you may wish to change the individuals who are set to benefit from a pay out.

How has the COVID-19 pandemic affected life insurance?

At the time of writing this article, the COVID-19 pandemic has not affected life insurance too much. The cost of premiums have not noticeably increased, providers pay out rates have not declined, and you can still get accepted for a policy.

The most significant changes to date have been made to the application process.

• Post-pandemic you will now be asked specific COVID-related questions such as; Have you tested positive for COVID-19?
• Are you displaying any COVID-19 symptoms?
• Have you ever been required to self-isolate?

Surprisingly, even if you are currently testing positive for COVID your application is unlikely to be declined. It is likely instead that it will be postponed until you have made a complete recovery, before cover can commence.

Write your policy in trust to avoid 40% inheritance tax & probate

This is a top tip for everyone reading this article who want life insurance. Whether you are in a relationship or single, writing your life insurance in trust can be a great idea that could save you thousands.

When writing your life insurance in trust you actually sign over the rights of the policy to a trustee or trustees, much like the executor of a Will. The trustee/s then administer the proceeds of the policy pay out on your behalf.

For example, you may request that your life insurance pay out be divided evenly between your 3 children, but that you only want them to receive the funds after they turn 18.

The proceeds of your life insurance policy avoid forming part of your estate and are therefore not subject to inheritance tax, which is 40% on anything exceeding £325,000!

As a result of the pay out avoiding your estate, loved ones will also not have to wait for probate to be granted before funds can be released, meaning a quicker pay out.

That said, if you have written your policy in trust, but have gone through a divorce this can cause complications.

If the policy was written in an absolute trust, it is unlikely you will be able to change the beneficiaries, meaning your ex-spouse is still likely to benefit from your policy.

If the policy was written in a flexible or a discretionary trust, it is likely you will be able to make the necessary changes to the policy to meet your changing requirements.

Conclusion

As a result of the unprecedented pandemic, the last two years have been extremely challenging for many of us. However, having adequate life insurance in place at least means your loved ones will be financially provisioned for if you are no longer around to provide.

Life insurance can be an extremely cost-effective financial safety blanket after a divorce; 20p-a-day could get you around £200,000 worth of cover.

However, premiums are calculated based on the likelihood of a claim, so it is best to take out cover in your 20s or 30s, locking in the super-low premiums.

The monthly cost of life insurance premiums can vary greatly between providers, therefore it is vital to compare multiple quotes. An effective way of doing this for free is to use a comparison website or an FCA-regulated broker, like Reassured.

The key considerations

• Joint life insurance is approximately 25% cheaper compared with two single policies, but can present problems after a divorce
• One party can take over a joint policy in the event of a break-up
• A joint life insurance policy is not considered marital property
• Some policies have a separation benefit which allows you to split a joint policy
• Having your own life insurance is normally a safer option, as it can remain with you even if the relationship does not survive
• Writing your life insurance in trust can help minimise 40% inheritance tax and avoid probate completely for a faster pay out
• COVID-19 has not affected life insurance in the UK too much and it is still possible to secure affordable cover
• Your age at the point of application is a key cost factor
• Always compare multiple quotes from a range of insurers

Sources:

* https://www.independent.co.uk/news/uk/home-news/divorce-inquiries-rise-pandemic-women-b1843359.html

** https://www.bbc.com/worklife/article/20201203-why-the-pandemic-is-causing-spikes-in-break-ups-and-divorces 

† https://www.moneyexpert.com/life-insurance/divorce/

PHOTO: RODNAE PRODUCTIONS FROM PEXELS
 

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