If your clients are thinking about getting a divorce, there's a lot more to think about than who gets the cat. It's a difficult time when advisers can really shine, writes Angela Faherty
For a growing number of British people, the phrase 'till death us do part' is no longer a keeper. In 2004 alone, 167,116 married couples went their separate ways, according to figures from the Office of National Statistics, giving the UK the highest divorce rate in Europe.
It does not make pleasant reading, but divorce is now a fact of modern-day life. And it's not just younger couples that are calling time on their days together. The average age at divorce is 42 for men and 40 for women, which is reflective of both the rise in age at marriage and the number of people divorcing - perhaps for a second time - in their 50s and 60s.
Gaining from the pain of divorce may seem somewhat callous, but advisers must be on the ball when it comes to handling the financial arrangements of those clients who have decided to untie the knot. Just as needs require reassessing when a couple has children or move house, the splitting of assets is part and parcel of the divorce process - whether that means deciding who gets the CDs or focusing on the bigger issues such as who gets the house, savings and investments.
It is here the adviser plays an important role. The divorce game is far more complex than simply deciding who gets what. At the most obvious level, when a couple splits, joint assets such as homes, pensions and life insurance need to be examined and divided, but there are also obvious prompts for a review of their protection needs.
"Clients will require a full financial makeover post-divorce," says Ian Noble, head of strategic partnerships at Lincoln Financial Group. "Both parties will need to make separate arrangements for a variety of products such as life insurance and mortgage protection. Endowments may need to be surrendered or assigned, and the same applies to whole-of-life and any joint life assurance policies."
The opportunities in the divorce market were made clear in July this year, when Yorkshire Building Society launched the first mortgage aimed at those going through a divorce.
Need for advice
"It's a sad fact of life that many relationships come to an end every year. This is an extremely upsetting and complicated time, especially when a relationship involves a shared home, and yet it can be difficult to find help and advice," says Rachel Court, head of mortgages at YBS.
While it is the obvious things such as the house and mortgage that many clients think about when splitting up, it an adviser's job to ensure that the less obvious needs, such as protection, do not get overlooked. Many couples forget that they also bought life cover when they took out the mortgage, or that they had critical illness (CI) or income protection (IP) insurance to protect against a major illness or the inability to work.
"Divorce presents IFAs with a fantastic advice opportunity, because above all else they still need advice on how assets should be split. While protection might be the last thing on someone's mind, their needs still require assessing," says Nick Kirwan, protection market director at Scottish Widows.
The exact protection and finance rearrangements needed will vary from one client to the next, but one obvious starting place when reviewing your client's protection portfolio will be to split any joint life or CI policies.
In the past, the only option would have been to cancel the agreement and take out single policies instead. While this may seem like a good idea, it may be worth remembering that any new policies taken out will be priced on current terms, and for older divorcing couples that may mean premium hikes.
Similarly, it is also worth noting that more advisers are advocating the sale of single life insurance policies written in the name of the husband and wife, particularly as such arrangements provides double the cover for almost the same price. This means that, in the event of a divorce, each partner does not need to take out a new policy if the other dies.
It is a common misunderstanding that joint life policies offer better value for money for a married couple, but the reality is there is very little difference in price. Premium quotes from moneysupermarket.com show that a non-smoking couple aged 30 next birthday would pay around £10 a month for joint 25-year term assurance of £100,000. Two single policies for the same couple would cost £7.50 for the man and £6.50 for the woman - just £4 more for double the amount of cover.
Although cancelling a joint life or CI arrangement and taking out two separate policies is still the only option with some providers, many insurers are becoming increasingly flexible. If the wife or husband is retaining custody of the children, the chances are that they will also keep the marital home, and some insurers will accommodate this by removing the husband or wife's name from the policy.
Both Standard Life and Lincoln Financial offer flexible products that are designed to better cope with the realities of divorce. In the event of a split, Standard Life offers the option of policy alterations on its products, which allows life cover to be assigned to one of the members of the joint life contract after a divorce, with no additional underwriting required.
Similarly, Lincoln Financial's separation option provides the person who would have been left without cover with a guarantee that they can take out the same level of protection they had before without the need for further underwriting.
More than two lives?
While many couples will want to separate everything they jointly own, there may be an argument for keeping a policy intact, particularly if children are involved. Any life cover taken out may have been designed to fund school fees, for example, so it is important to ask whether that still needs protecting.
"If an existing policy had been taken out to protect the family, then one useful way of keeping that policy intact would be to put it in trust and ring-fence the benefits for the children. That way, in the event that one parent dies, the funds would go to the children rather than to the ex-partner," says Kirwan.
Maintenance payments are also an aspect of financial arrangements that many clients may forget to address. Penny Raby, principal at Raby & Co, a family law firm, says this is one of the main areas that advisers dealing with divorcing clients with children must ensure they look at.
"One of the main things that is often overlooked in the negotiation of a divorce settlement is obtaining an insurance policy for maintenance payments. Whether this is in the form of income protection or a death benefit, there is a whole raft of solutions available. It's just that not a lot of people think about them," Raby says.
Mick James, marketing manager at Standard Life agrees. He says: "After divorce, an increasing number of people are remarrying, and this often brings extended families into the mix. To ensure maintenance payments are made, IP is the best option as this means that in the event that the maintenance-payer is unable to work, they would still be able to provide."
While life cover or IP offers an excellent means of ensuring maintenance payments are met should an ex-partner die, Noble says that family income benefit should also be considered, particularly if extended families are leading to greater costs.
"Clients who are put off by the perceived expense of life insurance may look at the possibility of family income benefit. Generally, it is a cheaper form of life insurance and provides a basic income for a set term - for instance up to a child's 18th birthday," he says.
Once the key arrangements for changes to family protection have been made, it is also worth looking at any benefits offered through the workplace. A mistake many clients can make is to forget to change the name of the recipient of any death-in-service benefits allocated through a group life scheme.
"If someone gets divorced and then dies, the death-in-service benefit will go to the individual listed in their expression of wishes. If this hasn't been changed, the recipient could be an ex-partner, which may be problematic if the deceased individual had remarried and had other children," says Kirwan.
For advisers handling divorcing clients, it is imperative to ensure that all aspects of the individual's protection portfolio is examined. Some divorces can be messy and most are emotionally fraught, but it is the adviser's job to make the financial aspect of a divorce as painless as possible. This means reviewing your client's portfolio in light of their changed circumstances, while also taking a look at their new financial responsibilities.
