Opinion & Analysis
Kara Gammell: Income Protection and Divorce
25 Sep 2020
For some families, lockdown has been much-needed time to spend with their families without the typical distractions of daily life. For others, the stress of job losses and financial worries has been the proverbial straw that broke the camel’s back in an already unhappy home life – and as a result inquiries for divorce have increased by more than 40%.
Law firms typically see a surge in divorce inquiries in January following rows over Christmas, but since the nationwide lockdown was enforced to curb the spread of Covid-19, Co-op Legal Services said it had seen a 42% increase in divorce inquiries between 23 March and mid-May, compared with the same period in 2019.
“Concerns about finances, employment, coupled with the fact that households are having to spend an increased amount of time together can add strain on relationships,” said Tracey Moloney, head of family law at Co-op Legal Services.
But no matter the circumstances, going through a divorce will be an emotional time.
With financial settlements to agree upon, the process can take some time and during this period everyone’s cash will be tangled up in the proceedings.
Then there’s the kids to think about: 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 could require years of childcare.
But, for many of us who have spent the majority of our adult lives as part of a couple, the sudden transition to singledom and the financial implications that result can be overwhelming.
Gone are the days of having another person to count on to bring home the bacon – now it is all down to you and for most of us, that is a scary thought.
To top it all off, the recent Covid-19 pandemic has had a devastating impact on the economy and on the household finances of many families – and that is for people who are in typically good health and have not been affected physically by the virus.
However, the prospect of a sudden illness affecting our ability to work has been at the forefront of many minds thanks to the media – and for single parents this makes existing worries about financial security more pronounced.
Help is available
The good news is that there are ways that you can protect yourself should poor health mean that you are unable to work.
Income protection policies are designed to ensure that the mortgage can be repaid or the rent covered in the event of long-term illness explained Kathryn Knowles, managing director of Cura Insurance.
“Before you get divorced it’s quite likely that both partners share their income and pay the bills together, so should one be too ill to work, the other can still bring in some income to the family home – but this changes after the marriage ends and means that most people will not have any sort of financial back-up if they become too unwell to work.
“Having your income drop to just Statutory Sick Pay, which is around £95 per week, will be a huge shock to many people’s lifestyle and it’s unlikely to even be able to cover rent or mortgage payments for most people.”
“When people are divorcing, people tend to have a couple of reactions to insurances. They either cancel straight away not wanting to pay towards the partner being covered, or they put it to the back burner – in my experience, it tends to be the former,” said Knowles.
Most parents want to make sure that regardless of their marital relationship, 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 planned for.
In the situation where the main wage earner does not share custody of any children, the likelihood is that he or she will be legally bound to make maintenance payments to support the children.
As a result, these maintenance payments should be thought about like any type of income when you are considering your financial protection plan.
For instance, what happens if the parent paying child maintenance becomes ill or dies prematurely? If they are unable to work, it may be difficult or impossible to pay any monthly maintenance going forward? Or what about if you were a single parent whose children are totally dependent on your income?
If this sounds like your situation, having a backup plan in place is even more crucial – and this is where income protection can help.
Income Protection (IP) is a type of insurance that would pay out a monthly income should one be too ill to work and could be a life saver for many families.
For instance, just look at the impact of the government’s current furlough scheme where people were guaranteed a portion of their incomes when they were unable to work due to Covid-19: it proved instrumental in helping many people to cope with lockdown and many admit that without this temporary help in place, they would not have survived financially.
Income protection offers a similar protection if you were to be unable to work due to ill health (rather than a global pandemic as in the government scheme), but on a much longer term.
“While this type of cover is not the cheapest kind of insurance that you will see, this is because you are far more likely to claim on it than you are life insurance policy,” said Knowles.
“Yet, few of us have taken out adequate insurance to protect our salaries should we be unable to go out and earn it.”
Figures from Zurich show that just one in ten of us have income protection. The amount of people with critical illness cover (which pays out a tax-free lump sum in the event of a diagnosis) is higher, yet according to the Financial Conduct Authority, 65% of the UK adult population does not have any form of protection insurance in place at all.
Yet, by contrast 71% of people insure our homes, 70% insure our holiday and 18% our mobile phone.
What’s more, according to the ONS, the chances of being robbed in the UK are 0.3%, while government figures say the chances of a long-term sickness absence are ten times higher, at 3%.
So, while long-term illness is more likely to happen than losing our home contents, we are still less likely to insure against it.
“After a divorce you no longer have your partner supporting you, if you are ill the government’s sick pay and disability benefits are not going to help you maintain your current lifestyle, it is all down to you to protect yourself and income protection is a great way to do it,” said Knowles.
Single mothers at greater risk
Women should take extra care to consider this element of financial protection as career breaks can also make mothers more likely to find themselves without any cover in place.
For many women, especially those of us with kids, we also underestimate the financial value of our role within the household.
It seems that women are less likely to take out income protection than men due to a traditional mindset, where men are perceived to be the main breadwinners and women’s income is regarded as less important.
To add insult to injury, according to ONS data, on average, women do 26 hours a week of such unpaid work, compared with the 16 hours completed by men. In fact, we do so much unpaid work that if it were paid, it would account for between 10% and 39% of GDP.
While both points apply equally to both genders, it disproportionately impacts women who typically take on the burden of childcare.
How much cover do you need?
So how can you ensure you are properly protected should you find yourself out of work due to an accident or sickness? How much cover is enough? And how much is it going to set you back each month?
A good rule of thumb should be enough to pay any bills and provide money so your family will be financially secure – and this includes child maintenance.
Like any insurance, it is crucial that you shop around before you purchase a policy. If you use a protection adviser, they can search the whole market for you and offer a range of solutions to suit your requirements and budget.
Policies are priced according to your age, general health and the amount you want to receive if you must make a claim.
When calculating how much cover you need, it makes financial sense to consider all the monthly outgoings you pay every month.
As well as your rent or loan commitments, you must include those everyday essentials such as council tax, utility bills and the weekly food shop. Fail to do so and you could still end up in debt trying to meet your other commitments.
Also bear in mind that we are all living longer so it is crucial to think past traditional retirement age when taking out a protection policy to ensure that you don’t come up short.
It is also worth considering the changing state pension age as it increases for both men and women to 66 by October 2020. It will rise again to 67 between 2026 and 2028.
How to find the best policy for your needs
The good news is that as with any financial product there are ways to get high-quality cover, without inflating the cost of premiums.
Always choose a policy that insures your “own occupation” – so, if you are unable to do your own job – rather than any work at all because you fall ill, you will still get a payout.
Luckily, this type of cover, while offering better protection, may not be costlier as it is factors such as age, smoking status, occupation, length of policy, deferment period, claim payment period and amount of cover that determines the premium.
Be completely honest in your answers to all the questions on the application, for example your medical history, otherwise the policy could be worthless.
You might feel that you are over sharing, but if you hold something back it could really affect whether the insurer pays out in the event of a claim and could be the life saver you need to keep your family afloat – especially if you are a single parent.
This item can contribute towards your unstructured IDD CPD requirement.