Ensuring families have adequate life insurance in place is a key part of an adviser’s role, and changes to the benefits available to bereaved families are about to make protection even more important.
The changes, which the government has described as modernising and simplifying the current complex system, replace a suite of bereavement benefits with just one: the Bereavement Support Payment (BSP).
Available to anyone under the state pension age whose spouse or civil partner dies on or after 6 April 2017, this provides an initial lump sum followed by up to 18 monthly payments.
Where there are dependent children, the sums are £3,500 with monthly payments of £350, giving a total of £9,800, while for those without children the figures fall to £2,500 and £100, totalling £4,300.
The current benefits
This compares to the current system where bereaved spouses and civil partners may be entitled to one or more of three different benefits. Providing they are under state pension age, most are entitled to the Bereavement Payment: a £2,000 tax-free lump sum.
In addition, and depending on age and circumstances, they may be eligible to either Widowed Parent’s Allowance or Bereavement Allowance. The former pays out where there is a dependent child, giving the parent up to £112.55 a week until the entitlement to Child Benefit ends.
Without a dependent child, Bereavement Allowance is an option. This is paid for 52 weeks to those aged between 45 and the state pension age at the time of their partner’s death. The amount someone receives is dependent on their age and the deceased’s national insurance contributions. For example, at age 45, the maximum weekly rate is £33.77 (£1,756.04 pa), rising to £112.55 (£5,852.60 pa) at age 55 plus.
Winners and losers
On the positive side, BSP is a much simpler proposition. Eligibility is determined by national insurance contributions and, as well as being tax-free, BSP will not affect other benefits or count towards the benefits cap. Recipients are also free to remarry or start a new civil partnership without it affecting the amount they receive.
Some people will be better off too. Among these are younger bereaved people without dependent children who lose their spouse or civil partner. Providing they are aged 46 or under, they should receive more under BSP.
While they stand to gain, the big losers are families with dependent children. With benefit payment restricted to 18 months, financial support to many families will be greatly reduced. For example, based on the latest figures from the Department for Work and Pensions, the Childhood Bereavement Network estimates that 91 per cent of widowed parents with dependent children would be supported for a shorter period of time.
“Three quarters of those with dependent children will be worse off under the BSP regime,” explains Alison Penny, coordinator at the Childhood Bereavement Network.
“So many parents describe these benefits as a lifeline and, although the government intention is that they will be moved onto Universal Credit, this offers these families much less flexibility.”
Financial hit
Some rough calculations based on current benefit rates show just how much families stand to lose as a result of the changes.
Under the old system, someone widowed when their child was a baby, and who never remarried or entered a new civil partnership, would have received around £95,640 in Bereavement Payment and Widowed Parent’s Allowance by the time the child reached 16. If the child had continued in approved education or training until age 20, this figure would increase to £119,050. With BSP, they stand to receive just £9,800, representing a shortfall of around £85,840 for a 16-year term or £109,250 for a 20-year term.
And these cuts are likely to hit women hardest, too. “The benefit change has a disproportionate impact on working-age women as they are statistically more likely to claim it,” explains Johnny Timpson, protection specialist at Scottish Widows.
“Seventy per cent of claimants in 2014 were female. Unfortunately, many women are also unaware of how little they would receive in benefits, with our research showing that 36 per cent of women with dependent children think they could rely on state benefits to support their family.”
Old-fashioned view
Another group to miss out in the government’s reform of bereavement benefits are cohabiting couples, even though its own figures point to significant growth in this area.
For example, the Office for National Statistics’s (ONS) figures shows that between 1996 and 2016 the number of cohabiting couple families more than doubled in the UK, up from 1.5m to 3.3m families. This compares to 12.7m married or civil partner couple families.
By not extending BSP to cohabiting couples, Royal London estimates they are missing out on around £82m a year, of which more than half would be earmarked for bereaved parents.
Debbie Kennedy, group head of protection strategy at Royal London, refers to this as a living together penalty. “It is outdated not to provide them with bereavement benefit. They pay exactly the same national insurance contributions as everyone else, and deserve the same support following bereavement,” she says. “Unfortunately, many cohabiting couples only find out that this is the case when their partner dies.”
Protection provision
Given the scale of the reduction in bereavement benefits, there is an opportunity to promote life insurance. Ms Kennedy recommends revisiting cohabiting clients to highlight the absence of any state safety net, but also helping married couples to make provision for any potential shortfall.
A level-term assurance policy can be a simple and affordable way to provide the necessary cover. For example, putting cover in place to replace the maximum £109,250 shortfall over a 20-year term would cost as little as £4.17 a month at age 25, or £6.50 a month at age 35.
Where clients are still young, this level of cover can be more than doubled without a significant increase in costs. For instance, at age 25, a policy giving £250,000 of cover can be purchased for as little as £6.93 a month.
Family income benefit is also worth considering. Emma Thomson, life office relationship director at LifeSearch, explains: “Rather than paying a lump sum, this pays a monthly income for the remaining term. This not only suits the income requirements of many bereaved families, but it can also make cover more affordable.”
As an example, a 20-year policy paying £1,000 a month would cost a 35-year-old £8.17 a month, compared to £11.79 a month for a policy paying a £250,000 lump sum. At age 45, the same policies would come in at £14.70 a month for the family income benefit and at £27.50 a month, almost double that, for level term assurance.
Awareness issue
But while affordable cover is available, Ms Thomson says the big issue is that awareness is low. She would like to see life insurers advertise their products more widely. “If you switch on daytime television there are plenty of advertisements for over-50s plans,” she says.
“The industry needs to promote other forms of life insurance too so people can take out the cover they need.”
Advertising could certainly encourage more couples to take out life insurance, but advisers can also help by making their clients aware of the changes to bereavement benefits and the protection they can put in place.
Given the scale of the potential shortfalls bereaved parents may see, having life insurance in place can provide considerable reassurance.
