5 things to know about life insurance and maintenance payments

Going through a separation is not pleasant and there can be extras that pop up that you’ve never even thought of. Needing to take out life insurance can be one of these extras.

 

We’ve supported people that have needed to set up life insurance in these circumstances and here are some key bits of information for you.

There can be times where one or both parents are told to arrange life insurance, to provide financial support for their children if they die while they are dependent.

 

The age of dependency isn’t set in stone, but it’s quite common for this to be anywhere from 18 to age 25.

 

The amount of money that each person is insured for will change depending upon the type of life insurance that is taken out. I go over this more in point 2.

 

The life insurance for each person will need to be set up either as a ‘life of another policy’ or an ‘own life’ placed into Trust for the child. This means that the child is the one that the money is intended for. The other parent will then usually be a Trustee for the policy and this means that they can access and use the money for the child’s benefit. 

 

Despite the name, Family Income Benefit is in fact a life insurance policy. This policy is designed to insure a certain amount of money each year, to be paid out of you die.

 

A quick example always helps.

 

Let’s say you arrange a family income benefit insurance of £24,000 a year until the youngest child reaches age 21.

 

If you die the life insurance policy will pay out £24,000 every year until your child is 21. This can help significantly towards food costs, school uniforms, sports clubs, heating bills etc.

 

This payment might be paid as as a monthly income, or it might be paid as a lump sum £24k payment each year.

 

You could decide instead to just go for what is known as term life insurance. With this one your insurance a lump sum of money to pay out once if you die, whilst the policy is active. This could look something like a £250,000 life insurance policy to pay out if die before your child turns 21. The amount of insurance is often suggested to be around 5x your annual salary.

 

It’s quite common for people to feel a little so so about setting up life insurance to help towards maintenance payments. Some people can feel as if it’s benefiting their ex partner, but ultimately this is all about making sure that your children aren’t going to struggle financially if you’re not there.

 

Providing financial support for your children if you die, is really important to try and make sure that they have the upbringing that you want them to.

 

But your ability to work can also have an affect on child’s financial security. Let’s say you live well beyond your child becoming financially independent, perfect. But what if you become ill and are unable to work? Will you be able to keep up your maintenance payments?

 

An income protection policy is designed to pay you a monthly income if you are ill and cannot work. This is usually to a maximum of 65% of your gross income.

 

By taking out an income protection policy you are making sure that you yourself are looked after financially if you are ill and cannot work. It also means that you can still take steps to contribute towards supporting your child. It can take a lot of pressure off you when you are ill and should be focusing upon your health, to know that your finances are taken care of.

 

4. Don’t cancel your existing cover

Some insurers offer the option to split existing joint insurance policies into single ones, when people separate. This can be a really good option, especially if your health has changed since you set up the original policies, as this could affect the price of the life insurance.

 

There can be a temptation to cancel insurance policies that could payout to an ex-partner, quite quickly as the separation is happening. But it could be that you do this and then find out you need to set up life insurance, to then find that your options for life insurance are now more expensive due to your health, work, travel or hobbies.

 

It might be that you do cancel your original policy, but it’s best to get advice and make sure that this is going to work well for you in the long run.

 

Insurance has quite strict rules and if you use a broker like ourselves there are certain things that we can and cannot do in these situations.

 

A good example is if you ask us to arrange life insurance on your ex-partner, without us chatting to them and you’re going to be paying the premiums too. We are not going to do this and reputable advisers will not do this for you either.

 

We are not allowed to arrange insurance on someone’s life without them knowing about it. There are a few reasons for this but the main thing to know is that arranging insurance in this way can mean that the policy will never pay out. 

 

Our award winning advisers will talk to you about the technicalities of arranging life insurance for maintenance payments, so that you can walk away with confidence that your children have the financial security that they need.