The key issue with joint protection policies when a couple divorce is ‘insurable interest’ and who has the rights to policy proceeds as well as the policy type, according to Mike Allison, head of protection at Paradigm Protect.
Mr Allison says ‘insurable interest’, in the case of protection cover the life (or lives) or continued employment that would cause financial detriment if lost or damaged, only has to be present at the outset of a policy.
The options for the couple at divorce will be therefore to cancel the policy; take out new policies to reflect changing circumstances and financial interests and requirements post-divorce (for example, new mortgage amounts and any family liabilities arising from maintenance orders); or retain the policy.
If medical circumstances have changed Mr Allison says it may be sensible to continue the policy with an agreement put in place regarding the proceeds, especially if one or either life will be rated or uninsurable.
Mr Allison says if the policy has a cash value (endowment /whole of life) the proceeds from the policy will form part of the joint assets of the divorcing couple and should be declared in the list of assets and be dealt with accordingly in the split.
He says: “One additional point to make is that cover will remain in place as long as premiums continue to be paid and ownership of the policy will remain unchanged unless either the divorce settlement changes the ownership or the divorcing couple agree to change the ownership themselves through assignment.”
Emma Thomson, life office relationship director of LifeSearch, says divorcing couples with joint life plans need to utilise the ‘separation option’ if it is available on the policy they have in place, though she warns not all plans have this. This option has the benefit of not involving medical underwriting.
But even if the option is available, Ms Thomson says there will be criteria that must be met, for example it may only be available if a new mortgage is taken out by either partner, and there will be restrictions on how much cover can be taken out.
If the separation option is not available, Ms Thomson says the cover may have to be cancelled and new plans taken out. She says this is one of the reasons why Lifesearch recommends customers take out single-life plans.
Ms Thomson says: “In addition to being better value for money, they provide more flexibility than joint plans should relationships unfortunately break down.”
Advisers who utilise the option to switch into separate single life plans without the need to provide any further medical evidence must take care, according to Alan Lakey, partner of Hemel Hempstead-based IFA Highclere Financial Services.
He says some plans only allow this option on mortgage-linked plans while others extend this to personal protection as well.
Mr Lakey says: “Often an insurer will impose an age limit, typically 55, for the exercise of this option and also a monetary limit, which will normally be identical to that of the joint life plan being discarded.