Life Insurance for Divorcees UK

Divorce or the dissolution of a civil partnership is one of life's most challenging events. Amid the emotional turmoil and complex legal arrangements, it's easy to overlook crucial financial details like life insurance. Yet, this is precisely when reviewing your protection policies becomes paramount. What was once a straightforward plan to protect a shared future must now be carefully unpicked and re-evaluated to safeguard the new realities of your separate lives, especially when children are involved.

This guide is designed to navigate the intricate world of life insurance for divorcees in the UK. We'll explore what happens to existing policies, how to set up new cover, and why protecting your income and health is just as vital. Our goal is to provide you with the clarity and confidence to ensure your dependants remain financially secure, no matter what the future holds.

Ensuring dependants are still protected after separation

Separation marks a fundamental shift in your financial landscape. A household that once relied on two incomes (or one primary income supporting the family unit) is now split. Responsibilities for mortgages, debts, and, most importantly, children's welfare must be redefined.

According to the most recent data from the Office for National Statistics (ONS), there were 80,057 divorces granted in England and Wales in 2022. Behind each of these statistics is a family undergoing a significant transition. For the 2.9 million lone-parent families in the UK, financial vulnerability is a major concern.

Failing to update your life insurance arrangements post-divorce can lead to devastating consequences:

• Your ex-partner could receive the payout: If you have an old policy naming your ex-spouse as the beneficiary, they would likely receive the lump sum upon your death, even if your intention was for it to go to your children.
• Maintenance payments could cease: If the parent paying child or spousal maintenance were to die without adequate life insurance, those vital payments would stop, placing the receiving parent and children in immediate financial hardship.
• Joint debts could fall on one person: If one ex-partner dies, the surviving partner could become solely responsible for 100% of any joint mortgage or loan.
• Children's inheritance could be at risk: Without clear instructions via a trust, a life insurance payout could become part of your estate, subject to delays from probate and potential Inheritance Tax (IHT).

Reviewing your protection isn't just an administrative task; it's a fundamental act of responsibility to protect the financial future of your children and loved ones in your new life.

Understanding Your Existing Life Insurance Policy

Before you can build a new financial safety net, you must first understand what happens to your current one. Most couples take out life insurance together, often in one of two ways.

Joint Life Insurance Policies

A joint life policy covers two people but only pays out once, usually on the first death. After this single payout, the policy ceases to exist, leaving the surviving person with no further cover. During a divorce, these policies present a significant challenge.

You generally have three options:

1. Cancel the Policy: This is often the simplest path. You both agree to cancel the policy, and each of you becomes responsible for arranging your own new cover. The downside is you'll lose the cover you've been paying for, and new policies will be more expensive as you are now older and may have developed health conditions.
2. One Partner Takes Over the Policy: Sometimes, one person can take over the policy, removing the other. This is not always possible and depends entirely on the insurer's terms and conditions. The person removed would need to arrange new cover.
3. Split the Policy: Some modern policies have a 'separation option' or 'joint life separation benefit'. This allows a joint policy to be split into two new single policies without further medical underwriting. This is an excellent feature, but it's not standard on all policies and usually has a time limit (e.g., must be actioned within 6 or 12 months of the divorce decree absolute).

Here’s a breakdown of the options for a joint policy:

Single Life Policies

If you and your ex-partner had separate, single life policies, the situation is much simpler. Your policy belongs to you alone. However, you still need to review it.

The most critical action is to review the beneficiary. If your policy was written 'in trust' for your ex-partner, you must change the trustees and/or beneficiaries. If it wasn't in trust, the proceeds would go to your estate. You'll need to update your Will to specify who should inherit these funds. We strongly recommend writing the policy into a new trust to ensure the right people (i.e., your children) receive the money quickly and efficiently.

The Importance of a Clean Break Order

In the UK, a "Clean Break Order" is a legally binding court order that severs all financial ties between a divorcing couple. It prevents either party from making financial claims against the other in the future.

However, a clean break doesn't happen overnight. Often, one party is required to pay ongoing maintenance to support the children or, less commonly now, the ex-spouse. A Maintenance Order will detail these payments.

This is where life insurance becomes a critical component of the divorce settlement. The court may order the paying party to take out a life insurance policy to cover the total value of their future maintenance payments. This ensures that if they were to die prematurely, a lump sum is available to replace the lost income for the children.

Key Point: A solicitor will often insist on a life insurance policy being in place to secure a Maintenance Order. It provides certainty for both parties and, most importantly, for the children.

Setting Up New Life Insurance After Divorce

Once your old policies are sorted, it's time to arrange new cover that fits your new circumstances.

What Type of Cover Do You Need?

There are several types of life insurance, each suited to different needs.

• Level Term Assurance: Pays out a fixed lump sum if you die within a set term. The amount of cover and the premium remain the same throughout the policy.
  • Best for: Covering an interest-only mortgage, providing a lump sum for your children's general living costs, or replacing a lost income.
• Decreasing Term Assurance: The potential payout reduces over the policy term, usually in line with a repayment mortgage. Because the cover amount decreases, premiums are lower than for level term cover.
  • Best for: Covering a repayment mortgage on a new property.
• Family Income Benefit (FIB): This is a lesser-known but brilliant product for parents. Instead of a single lump sum, it pays out a regular, tax-free monthly or annual income from the point of claim until the end of the policy term.
  • Best for: Replacing the specific monthly income lost from a deceased parent, making it easier for the surviving guardian to budget. It directly replaces the lost maintenance payments.

Here's how they compare for a parent wanting to protect their children until age 21:

How Much Cover is Enough?

Calculating the right amount of cover is crucial. A simple method is D.E.B.T.:

• D - Debts: Add up your mortgage, personal loans, and credit card debts. You'll want a policy that can clear these for your dependants.
• E - Everyday Living: How much income would your family need to replace each year? A common rule of thumb is 10 times your annual salary, but a more accurate figure is to calculate your family's annual expenses.
• B - Big Events: Consider future costs like university fees. The cost of raising a child to 18 in the UK is estimated by the Child Poverty Action Group to be over £160,000 for a lone parent. University costs could add another £30,000-£50,000.
• T - Time: How long do you need the cover for? Typically, until your youngest child is financially independent (e.g., 21 or 25).

Working with an expert adviser at WeCovr can help you perform a detailed needs analysis to arrive at a precise figure, ensuring you are neither under nor over-insured.

Critical Illness Cover and Income Protection: A Post-Divorce Essential

Life is unpredictable. While life insurance protects your dependants if you die, what happens if you become seriously ill or injured and can't work? As a newly single person or lone parent, your financial resilience is likely lower than it was as a couple.

Critical Illness Cover

This policy pays out a tax-free lump sum if you are diagnosed with a specific serious illness listed on the policy (e.g., some forms of cancer, heart attack, stroke).

For a single parent, a critical illness diagnosis can be financially catastrophic. Not only do you lose your income, but you may also face additional costs for childcare, medical treatments, or home modifications. A critical illness payout provides a vital cash injection to manage these costs without going into debt, allowing you to focus on your recovery.

Income Protection

Income Protection (also known as IP) is arguably the most important insurance policy for any working adult. It pays a regular monthly income if you are unable to work due to any illness or injury.

• Why it's crucial post-divorce: As a single-income household, your earnings are the sole pillar supporting your family. If that pillar is removed, even temporarily, the financial consequences are immediate.
• How it works: You can typically cover 50-70% of your gross monthly income. The payments start after a pre-agreed 'deferred period' (e.g., 4, 8, 13, 26, or 52 weeks) and can continue until you return to work or reach retirement age.
• Personal Sick Pay: This is a term often used for short-term income protection policies, popular with tradespeople, nurses, and electricians who may be in riskier jobs and have less generous employer sick pay schemes. It provides a safety net for shorter periods of absence.

Special Considerations for Business Owners and the Self-Employed

If you are a company director, freelancer, or sole trader, divorce adds another layer of financial complexity that requires specialist insurance solutions.

Company Directors

• Relevant Life Policy: This is a tax-efficient way for a company to provide 'death-in-service' benefits for an employee or director. The company pays the premiums, which are typically an allowable business expense. The payout goes directly to the director's family, free of IHT. It's an excellent way to set up new life cover after divorce without paying for it from your personal, post-tax income.
• Key Person Insurance: Did your ex-spouse play a crucial role in your business? If so, their departure creates a risk. Key Person Insurance provides your business with a lump sum if a key individual dies or becomes critically ill, giving you the funds to recruit a replacement or manage the disruption.
• Executive Income Protection: Similar to a personal IP policy, but it's paid for by the company. It's a tax-efficient way for directors to secure their income if they're unable to work.

Self-Employed and Freelancers

For the UK's 4.2 million self-employed workers, there is no employer sick pay to fall back on. Divorce often reduces financial reserves, making Income Protection an absolute necessity. It's the only way to guarantee an income stream if you're signed off work by a doctor. Without it, you would have to rely on state benefits, which are rarely sufficient to cover mortgage payments and family living costs.

Writing Your New Policy in Trust

This is one of the most important yet overlooked aspects of setting up life insurance, especially after a divorce.

What is a Trust? In simple terms, a trust is a legal wrapper you put around your life insurance policy. You (the settlor) appoint people you trust (the trustees) to look after the policy payout for the people you want to receive it (the beneficiaries).

Why is it VITAL after a divorce?

1. It avoids probate: A policy in trust is not part of your legal estate. This means the payout does not have to go through the lengthy and potentially costly process of probate (which can take months or even years). Your trustees can access the funds much more quickly.
2. It ensures the money goes to the right people: You can specify that your children are the beneficiaries. This legally ensures the money is used for their benefit and prevents it from accidentally going to your ex-spouse.
3. It can mitigate Inheritance Tax (IHT): For larger estates, a life insurance payout can increase the value of your estate, potentially pushing it over the IHT threshold. A policy written in trust falls outside your estate for IHT purposes, meaning your loved ones receive the full payout.
4. It provides control: If your children are young, you wouldn't want them to receive a large lump sum at 18. A Discretionary Trust allows your appointed trustees to manage the money on their behalf, releasing funds for education, housing deposits, or living costs as and when needed.

Most insurers provide trust forms free of charge. At WeCovr, we guide all our clients through the process of writing their policy in trust, as we believe it's an essential part of a robust financial plan.

Case Study: Sarah and Mark's Divorce

To see how this works in practice, let's look at a typical scenario.

• Before Divorce: Sarah and Mark have a £250,000 joint life, decreasing term policy to cover the mortgage on their family home. They have two children, aged 8 and 10.
• During Divorce: As part of their settlement, Sarah and the children will remain in the family home. Mark will move out and pay £800 per month in child maintenance until the youngest child is 21. Their solicitor points out that their joint life policy is no longer fit for purpose. If Mark dies, the payout would go to Sarah, but his maintenance payments would stop. If Sarah dies, Mark would get the payout, but he wouldn't necessarily use it to pay off the mortgage on the house he no longer lives in.
• The Post-Divorce Solution:
  1. They agree to cancel the old joint policy.
  2. Sarah takes out a new Level Term policy for £300,000, written in trust for her children. This is enough to clear the remaining mortgage and provide an extra lump sum for childcare and other costs if she were to die.
  3. Mark calculates his total maintenance liability: £800/month x 12 months x 13 years (until his youngest is 21) = £124,800. He takes out a Level Term policy for £150,000, also written in trust for the children. This guarantees his maintenance obligation is met even if he dies.

This new arrangement provides clarity and security. Both Sarah and Mark know that no matter what happens to either of them, their children's financial future and housing are secure.

Health & Wellness: Managing Stress and Staying Healthy During a Divorce

Going through a divorce can take a significant toll on your physical and mental health. The stress can disrupt sleep, affect your diet, and leave little energy for exercise. Prioritising your health during this time is not an indulgence; it's essential for your well-being and your ability to care for your dependants.

• Nutrition: Stress can lead to poor food choices. Focus on balanced meals with plenty of fruits, vegetables, and lean protein. Planning meals can help you stay on track and avoid convenience foods.
• Exercise: Physical activity is a powerful stress reliever. Even a 20-minute walk each day can boost your mood, improve sleep, and increase your energy levels.
• Sleep: Aim for 7-9 hours of quality sleep per night. Establish a relaxing bedtime routine, avoid screens before bed, and create a calm, dark, and cool sleeping environment.
• Mindfulness and Support: Don't be afraid to seek support from friends, family, or a professional therapist. Practices like meditation or journaling can also help manage stressful thoughts and feelings.

Staying healthy not only helps you cope better but can also have a positive impact on your life insurance applications, as better health often leads to lower premiums. At WeCovr, we believe in supporting our clients' overall well-being. That's why, in addition to finding you the right protection, we also provide our customers with complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app, to help you stay on top of your health goals.

How WeCovr Can Help

Navigating the world of insurance after a divorce can feel overwhelming. The terminology is complex, the stakes are high, and it's difficult to know where to start. This is where an expert, independent broker can be invaluable.

At WeCovr, we specialise in helping people through major life transitions like divorce. We're not tied to any single insurer. Our role is to be your advocate, understanding your unique situation and searching the entire UK market to find the policy that offers the best cover at the most competitive price.

We can help you:

• Assess your needs: We'll conduct a thorough review of your finances, dependants, and future plans to determine exactly what cover you need.
• Compare the market: We use our expertise and technology to compare policies from all the UK's leading insurers, including Aviva, Legal & General, Royal London, and Zurich.
• Handle the application: We manage the paperwork and communicate with the insurer on your behalf, making the process smooth and hassle-free.
• Set up Trusts: We provide expert guidance on writing your policy in trust, ensuring your payout is protected and goes to the right people without delay.

Divorce is the end of one chapter, but it's also the beginning of a new one. Let us help you put the right financial protections in place, so you can move forward with confidence and peace of mind.