Separation and divorce can be a harrowing and stressful time. Protection will often be the last thing that clients want to consider but when children or a substantial liability such as a mortgage is involved, keeping cover in place is vital. This week we consider how separation options can be used when a joint life policy is no longer suitable and which insurers include the best features to support this.

There are a number of reasons why clients may need to split an existing joint life policy into one or two single life plans. These include:

  • Divorce or dissolution of a civil partnership
  • Transferring a jointly owned mortgage to a single name
  • A client moving out and taking out a mortgage on a new house.

All providers offer a separation option to some degree but don’t necessarily cover all three situations.

*Old Mutual Wealth do not offer a mortgage protection plan and therefore do not cover mortgage related separation options.

Guardian have not been included in this insight as they do not offer joint life plans. If joint life is required they offer a “Dual Life” option which is essentially two single life plans with a policy discount. As such there is no need for separation options within the Guardian proposition as the plans are separate already.

Separation options are essentially another form of guaranteed insurability option and as such the new plan can be set up without any medical underwriting.  Like guaranteed insurability options some insurers will restrict who can exercise the option to those that have not been given a medical rating at outset of the original policy.

When the clients are looking to utilise the separation option, it can be a key to understand what terms will be offered to the client when separating the plan. The rates offered fall into two categories;

·         Rates at time of request – This means that the clients can switch the plan and will be given the rates available when the request is made.

·         Rates of the original plan – In this scenario the insurer would set the new plan up on the same rates that the client received when originally setting up the policy.

It will really depend on what the rates were when the original plan was set up compared to the rates now as to which will be more beneficial to the client.

Before exercising any form of guaranteed insurability option, it is essential to check if the client’s health or other underwriting factors have materially changed. If they have not and a new proposal can be expected to be accepted at ordinary rates, it is worth obtaining whole of market quotes to see if a different insurer would be cheaper. If changing insurer, it is important to get any new plan underwritten before cancelling the original policy or removing one life.

Where a policy has been in force for more than a couple of years a contract based on the rates when the original plan was taken out may be very attractive. The approach taken by each insurer is shown in the diagram below

Another limit that some insurers place on separation options is the age at which they can be exercised. Providers will have their own set of terms determining the age limit for when the option can be used and potentially to how long the new plan can be taken out until.

AIG, Canada Life, Legal & General, LV=, Old Mutual Wealth and Royal London do not set maximum age limits on the separation option apart from their own maximum age limits.

In last weeks insight “The difference between Life AND CI and Life OR CI”, we considered what would happen if there was a death claim on a Life AND critical illness plan. In such a scenario, the surviving life assured would be left with no life cover and critical illness cover where they are paying premiums for themselves and a deceased life assured.  As such for the critical illness element of such plans it would make sense to have a death of a life assured separation option. At present no insurer offers such an option which is a potential gap for those that offer stand alone critical illness plans.

Understanding when and how separation options can be exercised can help ensure protection remains in place during what can be a stressful time.

Overall, Legal & General, LV= and Royal London offer good separation options as they offer separation terms for all scenarios, with the option to take the new plan out to the maximum term they offer.

1 Comment

  1. Eric purdy

    Guardian have got it right. Joint life plans are kong outdated and should only be used in rare circumstances
    Never mind splitting up: if one person dies or claims on a CI the policy ceases leaving the survivor uninsured. They will be older, making the premium more expensive or even may be uninsurable.
    How is this treating a customer fairly?

    Reply

Submit a Comment

Your email address will not be published. Required fields are marked *