Cohabiting is on the up, with nearly three million couples in the UK choosing to live together without getting married. But, although they face potentially greater risk if the unexpected happens, research shows they are also less likely to take out protection than married couples.
Between 2003 and 2013, figures from the Office for National Statistics (ONS) show that there was a 28 per cent increase in the number of unmarried opposite sex cohabiting couples and a 68 per cent increase in the number of same sex cohabiting couples. In addition, 41 per cent of opposite sex couples and 6 per cent of same sex couples live with a dependent child.
But while cohabiting is fast becoming the norm, research carried out by Santander Insurance found that less than a quarter (23 per cent) of unmarried couples who jointly own or plan to jointly own a property would rely on their partner’s life assurance to cover financial commitments should they die or become seriously ill.
Instead of taking out life assurance, a similar percentage (24 per cent) would sell their joint property and 8 per cent would rely on help from family and friends. In addition, 15 per cent said they did not know what they would do and a further 5 per cent would risk repossession.
Not taking out life assurance puts them in a precarious position as Mark Russell, head of marketing at Santander Insurance, explains, “Cohabitation sometimes relies on joint earnings to fund a lifestyle that would be unaffordable should one party die or suffer a serious illness. This could cause financial hardship, with mortgages, rent and even living expenses becoming unmanageable.”
Unmarried risks
Not being married can add further risks too. While married couples can benefit from an inheritance tax exemption that allows assets to pass between them on death without triggering a tax liability, this is not the case for cohabiting couples.
Instead they would only have the nil-rate band of £325,000 (2014/15), with anything in excess of this subject to inheritance tax at 40 per cent. As an example, take a cohabiting couple who jointly own a property worth £700,000 and have further assets of £200,000. If one died, their share of the estate would be £450,000. Of this, £325,000 would be exempt from inheritance tax, with the remaining £125,000 generating a tax bill of £50,000.
In addition, a cohabiting couple would not be able to take advantage of the nil-rate band transfer available between married persons and civil partners. In the above example this would enable the surviving spouse to pass on two times the nil-rate band inheritance tax free on death. Assuming no changes to rates or the value of the estate, this would take £650,000 out of the estate and mean that the beneficiaries would only pay inheritance tax on the remaining £250,000, equivalent to £100,000.
In contrast, for the unmarried survivor without the nil-rate band transfer, inheritance tax would be payable on £525,000 (assuming estate already reduced by £50,000 tax bill on first death), giving beneficiaries a bill of £210,000. They would also inherit £640,000 of the estate, compared with the £800,000 that would be inherited by the beneficiaries of the married couple.
The other potential catch for cohabiting couples is how the estate would be divvied up if one of them died without a will. “There is no such thing as a common-law wife or husband,” says Danny Cox, head of financial planning at Hargreaves Lansdown. “If they owned a property as joint tenants, this would automatically pass to the survivor but, without a will, any other assets would be divided up according to the rules of intestacy.”
Under these rules, any children would be first in line to inherit the deceased estate, followed by surviving parents, siblings, nieces and nephews and so on.
Protection requirements
These risks may sound like propaganda for a pro-marriage campaign, but some thorough planning can significantly reduce them. First and foremost, Mr Cox recommends that cohabiting couples have a will in place to ensure that their estates are left according to their wishes. “This is particularly important where a couple have children from previous marriages. Where this is the case, a parent could make provision for their children on second death to ensure their partner did not suffer financial hardship,” he explains.
Adequate protection is also a must, with the amount and type dependent on capital and income requirements. For example, in an ideal world, a cohabiting couple should look to take out life assurance to cover any outstanding debts such as the mortgage and any loans as well as providing a replacement income, perhaps through family income benefit, for the survivor and any children. Income protection and critical illness may also be required to ensure they do not suffer financial hardship if one of them is unable to work as a result of illness.
When arranging cover, Roy McLoughlin, partner at Master Adviser, recommends taking out two separate policies rather than a single joint life one, even though it might cost slightly more. “Joint life plans are a complete waste of time. You only get one payment instead of two and you cannot split a plan if you decide to go your separate ways,” he says.
With life assurance, it is also important to ensure the policy is written in trust. This means the payout can go directly to the surviving partner instead of to the deceased’s estate where it could simply help to bump up an inheritance tax bill. Doing this also ensures it is available soon after death to settle any inheritance tax liability.
Some cover may also be available through an employee benefit scheme but, where this includes death in service, it is important to check it will be paid to the surviving partner. Scheme trustees have complete discretion regarding where to pay the money and may overlook an unmarried partner. Adding a partner’s details to any paperwork and sending a letter to the trustees confirming these wishes can help to ensure this does not happen.
Targeting cohabiting couples
As well as ensuring advice is appropriate to the needs of cohabiting couples, with this group less likely to take out cover, the protection industry also needs to find ways to target them.
Without marriage as a trigger for financial advice, McLoughlin says there needs to be more emphasis on the risks for cohabiting couples during the mortgage process. “A financial adviser can cover this if they are involved in arranging a mortgage but conveyancing lawyers also need to spell out the risks facing cohabiting couples,” he explains. “The Law Society strongly recommends that anyone taking out a mortgage should have protection and this warning is included on mortgage offers too but it needs to be stressed by the conveyancing lawyer.”
But, while highlighting the risks at this point should increase take-up of protection among cohabiting couples, those in rental property will still slip under the radar even though they could also face financial hardship in the event of a partner’s death or ill health.
As the rental market now accounts for 36 per cent of households in England and Wales according to the ONS, Chris McNab, manager for protection propositions at LV=, would like to see letting agents playing a bigger role in drawing tenants’ attention to protection. “A large number of cohabiting couples are in rental property and it is in their interests – as well as that of their landlords – for them to take out protection,” he says. “As renting becomes increasingly common it would be good if protection became part of the discussion when arranging the tenancy agreement.”
While this scenario may be some way off, as the number of couples choosing to cohabit continues to grow, helping them understand the risks, and providing suitable protection to manage these risks, is essential.
