With the percentage of marriages ending in divorce increasing more rapidly in the first 10 years of marriage*, any children could still be very young. And, sadly, the media are predicting a spike in divorce as we come through the other side of the Coronavirus pandemic.
The financial implications
Following separation or divorce most life policies will either be cancelled or, for those lucky enough to have a flexible menu plan, couples may be able to split their polices and continue with their very valuable cover.
But for those estranged families left with no protection, there could be major repercussions. In the situation where the main wage earner doesn’t share custody of any children, the likelihood is that he or she will be legally bound to make maintenance payments to support the children. But what happens if they become ill or die prematurely? If they are unable to work it may be difficult or impossible to pay any monthly maintenance going forward. This could leave the children in a terrible situation.
Family income benefit
A solution may be to consider a family income benefit (FIB) policy to protect those very valuable and generally much needed maintenance payments. FIB is designed to pay a regular income to replace a loss of earnings as a result of being diagnosed of a critical illness or dying. The income is paid tax free and can be set up on a level or indexed basis and can be written in trust or on the life of another.
Let’s imagine a newly divorced couple with children and a maintenance agreement of £1,000 per month. Would most people rather have the full £1,000 per month completely unprotected in the event of illness or death? Or £950 a month with the remaining £50 per month used to take out a FIB policy?
FIB can be a low-cost, easy solution for a client to provide their family with an income rather than a lump sum if they die. It can be especially attractive for clients with young families as they might want cover to run until their children are grown up.
Some parents want to make sure, whatever happens to their relationship, that their children are brought up in a secure environment with no financial worries. This means not only the fixed cost household bills, but also holidays, trips, birthdays, Christmas and treats are all financially planned for. Maintenance payments should be thought about like any type of income. What is the risk of that income stopping? If that would mean a material change in circumstances, then this risk needs to be covered.
For more information on our family income benefit speak to your usual Royal London contact or visit our CPD hub where we have a module about understanding the value of family income benefit.
This blog first appeared in FTAdviser
ONS - Divorces in England and Wales: 2018 (released 29 Nov 2019) and ‘What percentage of marriages end in divorce’ 2011