Sound financial advice can be crucial for couples remarrying and looking to update their life cover, particularly if there are dependent children involved. Georgina Kenyon investigates
When couples remarry, both people need to think about financial issues in the broadest possible sense; and this means more than just considering houses and assets. According to the most recent figures from the Office for National Statistics, there were 270,700 remarriages in 2004.
Advisers need to understand the complications and often very different needs and wants of a couple that are getting remarried. In the period after divorce and before remarriage, it is often the adviser's role to help the couple make sound financial decisions.
One key issue is what protection people need when they remarry - particularly if they have children from their previous relationships. Advisers need to consider the protection needs of each person carefully, together with the needs of any dependent children.
Peter Chadborn, principal of CBK, says: "Advisers need to be sensitive to differing opinions, particularly when children are involved, and they must be careful not to make assumptions that both partners will share the same aspirations for their family's financial security."
Although it may not be easy, both parents need to think about their death and make financial plans for their children.
"The financial landscape will have changed and so will the financial consequences of death or serious illness to either partner," explains Chadborn.
The protection needs of the family at this time will need comprehensive change and issues such as inheritance and possible future illness of either parent will need to be considered with income protection (IP), life policies and critical illness (CI) cover having to be reassessed.
Trusts, maintenance payments and wills are also important aspects to consider, especially when children are involved. New life policies can be arranged either on a joint life or single life basis. Experts advise that although some policies have a separation option, most will not be appropriate after divorce. It is also likely that one of the parents will not have adequate levels of cover.
Andrew Cook, protection marketing manager at Standard Life, says: "If a joint life cover policy hasn't already been altered to cover one life only, then remarriage is an appropriate time to sort out these policies."
Yet it could also be the case that the parent can now afford cover that they were unable to afford earlier.
Although cancelling a joint life or CI policy and taking out two separate ones is often the only option with some providers, many insurers are becoming more flexible. If one parent retains custody of the children, they will often retain the house and some insurers will remove the spouse's name from the policy in this instance. Cook explains that it is possible to amend joint life policies so that they only cover one life.
"But personally, I think two single life policies are better as they can provide for differing requirements on each life such as retirement ages, tax liabilities, as well as continuing cover in the event that one life dies," he says.
"It may also be more cost effective placing the two policies with different insurers," he adds.
Stephanie Gold, product support manager at Lincoln Financial Group, advises: "Basically, you need to consider what the life assurance options are. You need to ask what happens if the man or the woman have cover with their previous partners and can single cover be put together as jointly?
"The people involved also need to ask themselves what would happen if I died or contracted a critical illness, and what would happen if my new marriage ended?"
She explains that if separation options were not part of the couple's life cover, it may still be possible to assign the policy to one party who would then become responsible for maintaining premiums.
"They would, however, benefit if either party died or contracted a critical illness, depending upon the cover in place," she says.
This can be particularly valid if one party remains reliant upon the other for either maintenance payments or providing childcare.
"Most importantly, advisers should be careful to ensure that no policies are cancelled until any new or replacement policies are on risk," urges Gold.
Options
Although many eventualities can be catered for through consultation with a solicitor, to ensure that documents such as wills are updated, there may be various options available with regard to life assurance policies, which should be carefully considered. The need to be fair to each child in terms of protection and security is important and particularly sensitive when it comes to stepchildren.
"Although there may be a new partner to consider, priorities often remain with the children," says Gold.
Agreeing with Gold, Chadborn says: "Most people will agree with the need to ensure the financial security of their children if they are dependents, but views can vary wildly in terms of what should be inherited if there is technically no financial dependence."
"But when children are involved from previous relationships, these opinions can become magnified if one partner's children appear to be better provided for than the other's," he explains.
Gold says that in the case of children's cover, where a lump sum is paid out upon diagnosis of a specified critical illness, the policy can be extended to cover stepchildren, if a parent so wishes.
"Care should therefore be taken at outset to choose a provider who can cater for changing circumstances in the future," she explains.
She advises people to make sure that stepchildren are eligible for children's cover, subject to them having been legally adopted by the life insured and certain age restrictions.
When considering financial arrangements and protection for children, it needs to be understood whether or not the children are now in the new marriage or if they are being cared for by the other partner. The need to cover any maintenance payments, school or university fees is also important.
An insurance policy for maintenance payments is another area that is often overlooked. Family income, IP, benefit and life cover are options for covering maintenance payments. It is probable that when a person remarries, there will be a consolidation of property and assets, which will affect inheritance tax issues. This presents an opportunity to cover these with whole of life put in trusts.
Trusts
Cook says: "We believe that most if not all policies should be written within a trust."
"Indeed, if there are children from different marriages involved, a trust should help to remove any debate about where money is to be paid at a time when any family disputes would certainly want to be avoided," he concludes.
Gold advises that if policies are put in trust then they should ideally be set up in such a way that allows for flexibility in the future - for example, to add future children or stepchildren.
Chadborn also urges advisers to have a comprehensive understanding of latest trust and inheritance tax developments.
"A debate involving stepfamilies and money is a potentially flammable one. Particularly if it identifies that your clients money may not end up where they intended," he concludes.
When a client remarries, advisers should use the opportunity to advise their clients afresh with perhaps more up-to-date advice than the couple had before, considering not only their changed circumstances but also new opportunities.
