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Changing protection needs post-divorce

This article is part of
Guide to Mortgages and Divorce

It is always advisable for a divorcing couple to review their protection policies in the light of their new circumstances.

Jeff Knight, director of propositions at Castle Trust, notes, however, that this is not normally a requirement of the mortgage lender.

Keith Churchouse, Chartered and Certified financial planner of Chapters Financial Limited, says it is important that protection cover, such as life cover, is reviewed to ensure any borrowing liabilities are covered, along with the protection of the family.

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He says: “It is also common for maintenance payers to have life assurance placed on their life (on a life of another basis) to protect the recipient... for the term of the agreed maintenance agreement, which might be until the children end higher education.”

The impact of divorce on the customers’ mortgage protection requirements will largely depend on the situation at the time of divorce or conclusion of financial arrangements, according to Tom Riley, head of product at Nationwide.

He says any protection held by parties should not be cancelled until there are no longer any joint liabilities. This means, according to Mr Riley, upon the completion of the sale of the property any joint decreasing term insurance plus critical illness cover policy can be cancelled.

If the policies are in sole names rather than joint, Mr Riley says these may be able to be used towards the protection of any new mortgage.

Mr Riley says: “The customers may want to take out new policies to cover any new liability. The new cover may not be as comprehensive or may be more expensive/cheaper than previously depending on individual circumstances.

“Customers may also decide upon completion of the divorce that they no longer require any protection, especially if there are no children in the partnership.”

If one party buys out the other party, upon the completion of the transfer of ownership Mr Riley says once again any joint decreasing term insurance plus critical illness policy can be cancelled.

If the policies were in sole names, Mr Riley points out the new sole owner may be able to use the existing plan towards the protection of the new mortgage if the term and mortgage amount remain unchanged.

If either the term or mortgage amount changes, Mr Riley says the customer may need to cancel the current policy and take out a new plan. Once again, he warns any new plan may be more expensive, or not as comprehensive as the one previously held.

Any previous insurance may have been in the ex-partners name only as the new owner may have been declined cover, he adds.

Mr Riley says: “If the client remains uninsurable there will be a financial risk for the customer. The customer could decide that they do not want any insurance, cannot afford it or buy protection to budget.”

If both parties continue to pay the existing mortgage, then Mr Riley says if there is a joint decreasing term insurance plus critical illness policy then this could be retained.