Richard Walsh: Divorce – Adviser Support is Vital

Kara Gammell’s recent article pointed out that 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. With more local lockdowns, and the real risk of another National one, relationship breakdowns are likely to continue to increase. Divorce and separation are life changing events and are a crucial time to reconsider the protection needs for both ex partners. There is a clear role for advisers here. Some people agree a settlement between them. Others take the legal route. But even those who do that are unlikely to meet a family lawyer who will spend any time on, or have any detailed experience of, protection insurance.

So what are the facts on the financial impact of divorce? Aviva published a comprehensive report “The Hidden Cost of Divorce and Separation” in 2018. Although the numbers are likely to have changed a bit since then, for example expenditure is likely to have increased further, the report remains the best analysis on this subject.

It’s an expensive business. UK couples spend £14,561 on average when they divorce or separate, rising 17% since 2014, although average spend on legal fees is £2,679. One in six who separate also buy a new home, spending an average of £144,600, but 51% turn to the rental market. Of those currently renting as a result of their split, 70% feel that they will be unlikely to buy a property in the future. The average time spent as a tenant post-separation is 4.7 years, however almost one in five people rent for more than a decade. The only product that can effectively protect renters is Income Protection (IP) yet many families only have term life/CI policies that they set up when they bought the house which may well now have been sold. Even those who have IP may have radically changed circumstances. On the one hand a quarter of people work longer hours after divorce or separation, and on the other hand more than one in ten adopt flexible working patterns – which may often involve working less hours. So even if they have IP their levels of cover may need to change.

Then we move to the knotty issue of who had control of the finances before the break up. Those who did not will need to ensure that they are well prepared for the future – either through protection they buy or that an ex partner agrees to continue. Fortunately 73% now have at least some shared finances but that means 27% kept their finances completely separate from their former partner when they were together. But the downside of shared finances means an often complicated and time consuming process of untangling them. Those figures are different for different age bands. Former couples aged 25-35 are least likely to be equally responsible for their finances, compared to 46% aged between 46 and 50. Men are most likely to have had sole responsibility for a couple’s finances than women but either way people will need help and advice to understand the risks they face, particularly those who have not managed their own financial affairs in the past.

I have already pointed out the importance of the IP discussion and it applies to both ex partners. For the partner paying maintenance what happens if they are off sick? If they have assets they may find they lose them and regardless of that they are unlikely to want their children to fall into poverty and rely on Universal Credit. For the partner with the children, maybe they also work and rely on that income to maintain a decent standard of living. Again IP comes to the fore and this is critical for those who end up renting.

Of course, some people (around a quarter) end up living in mortgaged property – either the home they lived in before or a new place. Many will have had life/CI policies and these need to be reviewed. This is especially the case for joint ones. Whether individuals can extricate themselves without having to set up two newly underwritten policies varies hugely between products that may have been bought a long time ago. But this conversation must be had. Protection Guru provides an analysis of the behaviour of different insurers in this situation https://protectionguru.co.uk/2020/10/19/joint-life-separation-benefit-who-does-what/?

Finally, it is worth mentioning that a large proportion of separating couples are between people who were co-habiting. Such couples have very little legal protection yet the need for the same conversations on protection applies just as much.

In practice, probably without any adviser involvement, around 6% cancel their protection cover, and the same number cut it back. 6% also cancel their pension contributions in order to supplement their income. But here is the rub 31% agree that they need to revise their life protection cover since the separation, but haven’t got round to doing so. Also 21% of people said they did not have life protection in place when they were in a relationship, and still do not, suggesting that some of those who have not got round to doing so, have no existing policy in place at all.

Now, more than ever, it’s unfortunately time to shine the spotlight on divorce, separation and protection insurance. As well as being “the right thing to do” there are clearly business opportunities for advisers in this market. IP should be a required discussion point when a couple are agreeing the details of their divorce/separation settlement, especially if a maintenance agreement is involved, along with any existing term life/CI policies. This is especially the case for women as they usually end up being the main carers of the couple’s children.