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Insurance Review: Help families avoid a death trap

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Changes to state financial bereavement support make it more vital than ever for families to consider extra protection

Advisers will soon have to get to grips with changes to the state system of financial bereavement support, which will leave some clients far worse off if their spouse or civil partner dies.

The changes come in next month and will have a big financial impact on anyone with children, making it more important than ever for families to consider extra cover.

Mortgage advisers play a huge role in ensuring consumers think about protection. It is often only when couples apply for a mortgage that they think about how they would cope with monthly repayments and other outgoings if one of them were to die.

Current state support

Under current rules, when someone dies there are three potential state benefits the bereaved can receive.

Widowed spouses or civil partners are eligible for a £2,000 tax-free bereavement payment, regardless of whether they have children. Those without children, and aged between 45 and state pension age, also qualify for a bereavement allowance: a taxable benefit of up to £112.55 a week, payable for a maximum of 52 weeks. The allowance rises in line with inflation.

Widowed parents can claim the widowed parent’s allowance, which also provides a taxable allowance of £112.55 a week. This can be claimed until the youngest child stops being entitled to child benefit, or when the bereaved parent moves in with a new partner or reaches state pension age. It increases in line with inflation.

What is changing?

From April, these three benefits will be replaced by a new bereavement support system, which will provide a £2,500 tax-free payment to bereaved spouses or civil partners, or £3,500 for those with children. There will also be payments of £100 a month for those without children or £350 a month for those with children, payable for 18 months. Payments will not rise in line with inflation and are not taxable.

While it may seem positive that bereaved partners will receive a larger initial lump sum, and that those without children will receive monthly payments for longer, those with children could end up much worse off over the long term. Whereas the current scheme potentially supports children until they reach the age of 20, payments will be made for a maximum of 18 months under the new rules.

Why cover matters

Having financial support when a partner dies can provide valuable peace of mind. State aid may offer a financial cushion but £350 a month is unlikely to cover all bills, mortgage payments and usual expenditure for most people, which is why extra protection can be vital, particularly if children are involved.

The fact that state help is limited to 18 months also means provision will be needed for after this period.

According to research by LV=, the cost of raising a child from birth to the age of 21 has reached an eye-watering £231,843 once childcare, clothing, food and other day-to-day costs are factored in: enough to place a huge strain on family incomes, particularly if one partner dies or is unable to work.

Affordability assessments enable mortgage advisers to see exactly what clients’ essential expenditure is and how much protection they need to cover it.

And cover is important not only for the main earner. If the partner responsible for most of the childcare dies, this may affect the surviving partner’s ability to earn as they may have to give up full-time work to look after their children. This could lead to financial pressures just as great as if the main breadwinner were to die.

It is also important to remember that those who are unmarried or in a civil partnership at the time of their partner’s death will not be eligible for any state financial bereavement support.

The simple fact is that people cannot rely on the state to maintain their lifestyle should the worst happen, and families need to take protection seriously. The upcoming changes are a good reminder of this, and even a small amount of cover could provide options at a very difficult time.

Lucy Brown is head of protection sales at L&C Mortgages

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