Insurance advise for the newly divorced

9 min read

Financial discussions with clients during divorce tend to focus on dividing assets and cash, but reviewing insurance is an area that can make a big difference to your clients and their families.

Financial discussions with clients during divorce tend to focus on dividing assets and cash, but reviewing insurance is an area that can make a big difference to your clients and their families.

Divorce is a common part of Australian society and it can have a negative financial impact on many people who go through the process.  Life insurance is an area where advisers can offer value, particularly where young children are involved.

BT Financial Group’s Rachel Leong offers some tips on what advisers should consider when dealing with a divorce situation, to ensure their client has sufficient cover after separation.  In doing so, advisers can remove one area of concern during an emotional and stressful time.

Over 40 per cent of Australian marriages fail. This is despite the number of marriages increasing since 1950, and the divorce rate decreasing since 1980. Another striking fact is that over 47 per cent of divorces involve families with minor children[1]; and sadly, overall, nearly one in five young Australians suffer long-term social and economic setbacks due to parental divorce.[2]

Maintaining the parent-child relationship can be challenging for the parent no longer living in the family home and can also be an issue for the primary care parent who has to deal with the day-to-day pressure of child-rearing on their own. After divorce, there is often the loss not only of a partner, but also an extended family network who may no longer be available as casual carers, causing further stress to the main caregiver.

One of the top reasons cited for divorce include financial issues[3], along with lack of communication and infidelity. Furthermore, both parties’ financial situation worsens after divorce,   particularly for women[4]. Studies show that, on average, divorced mothers spend a higher percentage of their household budget on necessities such as groceries, clothing and utility bills, compared to their married counterparts4.  Therefore, insurance advice should to be tailored according to your client’s changing requirements. Addressing the specific financial protection needs of your newly-divorced client may help reduce conflict with their former spouse, and allow a more harmonious existence for their children.

[1] Australian Institute of Family Studies - Marriage in Australia, and Divorce in Australia.

[2] Australian Institute of Family Studies - Effects of changing family structure and income on children

[3] UK - The nine most common reasons couples get divorce.

[4] AMP.NATSEM's report - Divorce: For Richer, For Poorer. 2013.

There are a variety of situations that apply to both parents, which put at risk the ability of the main caregiver to pay household expenses and maintain stability for the children; including temporary disablement, permanent disablement, critical illness (where the choice has been made to take time off work to recover), and death. There is a broad range of life insurance policies that cater for these circumstances. Each parent should assess their financial contribution to the welfare and care of their children, and determine an appropriate amount of cover accordingly.

Keep in mind that your client’s situation may have changed dramatically due to divorce, for example, they may need to enter or return to the workforce, or give up work to look after young children. Below are some tips to help you guide your clients through the different types of cover that may apply after a marriage or relationship breakdown.

Tip 1: Through income protection (IP) insurance, your client and/or their former spouse can cover up to 80% of their monthly income, helping maintain the children’s lifestyle and wellbeing in the event of disability. 

If the non-residing parent is working, then insuring their income is just as important as the main carer’s income (or their ability to perform home duties), to ensure that any financial child support can continue in the event of temporary or permanent disability. Inevitably, there will be situations where the main carer wants the other parent to obtain IP cover, but they are reluctant to, because of the strained relationship that now exists between them. Even though most parents want to provide financial, emotional, and physical stability to their children, deterioration of the relationship with their former spouse can get in the way. This is why it is critical for the parents to maintain an open dialogue with each other, and to keep the children’s welfare front of mind.

The amount of child support payable can be determined through an informal or formal agreement between both parents. However, if this is not feasible, the amount will be calculated by a Department of Human Services (DHS) assessor and based on the amount of adjusted taxable income derived by each parent, the individual percentage of care that they provide to their children, the number of children, and the children’s ages. Therefore, any changes to the income of either parent may affect DHS child support payments.

In regard to how much IP cover should be recommended in these situations, for the child support-paying parent, cover could be provided up to when child support payments would normally cease – generally at age 18. The required level of cover may decrease at this point. However, the maximum amount of IP cover (75% or 80%) may be chosen, as any excess can be used at their discretion.  It would also be common for the main caregiver’s income (if applicable) to be insured up to the maximum level possible.

It should be remembered that the main carer may work full-time, part-time or spend 100% of their time caring for children and the household. Whatever responsibilities they may have, there is a range of IP policies that cater for all of these situations.

Tip 2: Living insurance can help cover medical costs in the event of a parent suffering a serious illness or injury, and help with the continuation of support for the children.

Living insurance (also known as trauma insurance) can provide a lump sum payment for people suffering from one of a range of specified medical events. A lump sum payment could be crucial to helping someone living with the illness or injury, to assist with medical and accommodation expenses. Trauma insurance proceeds can also be used to reduce debt to allow more flexibility with work. This can be important in situations such as where a parent wants to work part-time, or change careers after the illness or injury.

In addition, trauma payments could be used to replace income, if the choice is made to take time off work to recover. While trauma payments are not contingent on the insured person’s inability to work, allowing for this in the sum insured provides flexibility. If the child support-paying parent chooses to take leave from work after suffering from a specified medical event, their adjusted taxable income will reduce and their required payments to their former spouse may also reduce. However, parents who are focussed on the best interests of their children can use trauma proceeds to continue the financial support that would otherwise be provided by child support payments.

For the main carer, trauma payments could be used to replace their income (if applicable) and/or to pay for professional help with domestic duties, allowing time away from these responsibilities in order to regain their health.

Tip 3: There are different Total and Permanent Disability (TPD) definitions that are relevant for your divorced clients and their changing circumstances.

In more serious circumstances, if your client becomes totally and permanently disabled as defined under the policy, TPD insurance can pay a lump sum benefit.

There are two main types of occupation-based TPD insurance – ‘own occupation’ and ‘any occupation’. Own occupation TPD insurance proceeds are payable if your client is permanently unable to work in their current occupation. Any occupation TPD insurance proceeds are payable if they are permanently unable to work in an occupation that they would be suited to with their education, training and experience. Some policies will also pay a benefit if your client is able to work, but in a severely reduced capacity. Again, while mandatory DHS child support payments may reduce, allowing for lost income in the TPD sum insured will allow the contributing parent to continue to financially support their children.

While an occupation-based TPD may be appropriate for an income-earning main caregiver, there are also policies available for homemakers where a benefit is payable if your client is permanently unable to perform normal household duties. Insurance proceeds can be used to pay for someone to perform these duties if your client is no longer able to.  

Tip 4: Term life insurance can help pay off debts and maintain the children’s standard of living if either parent passes away

Term life insurance pays a lump sum benefit if the insured dies or suffers a terminal illness. If your client is deemed to have less than 24 months to live, an advanced payment may be made for terminal illness depending on the policy definition.

The non-residing parent can provide for their children’s future, by allowing for their portion of lost income and education expenses in the term life sum insured. Where there is concern that insurance proceeds would not be used for the genuine maintenance, care, education and medical needs of the children, a testamentary trust could be established (via their will) upon death, to ensure that payments are used for their intended purpose. A reliable family member or friend of the non-residing parent could be the trustee of the trust, to ensure that payments from the trust are used appropriately. A term life payment could also ensure that property is passed onto their children debt-free, if the mortgage is fully covered.

Claim proceeds from a policy owned by the main carer can be used to eliminate the mortgage on their home, and allow the children to remain there, where suitable. Cover can also be used for the remaining portion of lost income and education expenses, as well as any final expenses.

Conclusion

The dissolution of a relationship can have wide-ranging impacts on all members of the family. Each parent may experience significant lifestyle changes, and if so, their insurance needs are likely to change. A review of their current insurance portfolio is paramount, with an assessment of whether existing definitions and level of cover are still suitable.

If a change in the underlying definition is required, this can sometimes be achieved through a simple policy amendment. Where a cancellation and reissue of policy is the only option, the process is often much less onerous in comparison to the full application process; and may avoid medical underwriting, depending on the particular policy series, and when the original policy commenced.

If a change in the level of cover is required, many lump sum policies allow an increase to the level of cover upon divorce, without underwriting. Often a divorce will result in both parents taking on more debt, due to the sale/purchase of property/ies. This creates greater financial exposure if either parent becomes disabled or dies.

While dealing with a marriage breakdown is always going to be difficult, eliminating financial exposure or instability as an additional reason for tension will help parents focus on what matters most.

 

About the Author

Rachel Leong is the Senior Manager - Product Technical for Life Insurance at BT Financial Group

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