Family income benefit to protect maintenance payments

23 July 2020
There were 90,871 divorces of opposite sex couples in 2018.*

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

Source:
ONS - Divorces in England and Wales: 2018 (released 29 Nov 2019) and ‘What percentage of marriages end in divorce’ 2011

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About the author

Shelley Read

Senior Protection Development and Technical Manager

Shelley has worked in financial services for over 25 years, starting her career in the Mortgage world and then from 2008 in protection field Face to Face Sales. Shelley was originally with Bright Grey and Scottish Provident and latterly representing Royal London in the West Midlands and Warwickshire area. Shelley moved to her current team in July 2017 and now covers all of the UK. Shelley is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Shelley therefore has an in-depth knowledge of the mortgage and protection market and her strengths have been training and coaching advisers to recommend protection solutions to their clients and delivering this coaching in an easy to understand and simple way. Shelley’s area of expertise also includes Family Protection and Business Protection. Shelley hosts a monthly book club in Sutton Coldfield and also enjoys attending various cookery courses both at home and abroad to improve her cooking skills and her love of entertaining friends and family.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.