Everything you need to know about family income benefit

·6-min read
 (Unsplash)
(Unsplash)

Family income benefit is a type of life insurance cover that secures regular payouts for your family.

As insurance goes, family income benefit is slightly different to other versions of life cover. Here’s how it works and why it might offer the sort of financial protection that’s suitable for you and your loved ones.

What is family income benefit?

Family income benefit is designed to pay out a monthly, tax-free income to your family should you die during the life of the policy that you’ve taken out.

It differs to other types of life insurance policy because, instead of family members receiving a lump sum of money after you have passed away, the benefit is paid to them like an income in monthly instalments.

If, say, you are the household’s main breadwinner, the idea behind family income benefit is that your spouse, or other dependants, wouldn’t be left to struggle financially after you died and once your salary had stopped.

Regular payments can ease the burden on bills and make budgeting more manageable for those left behind. An ongoing income is also potentially easier for grieving beneficiaries to make use of compared with, say, the challenge of deciding what to do with a cash lump sum typically paid out by other forms of life insurance.

How does it work?

When you take out family income benefit, you set a time limit or ‘term’ on the policy for the cover that you’re buying. If you die during the term, your family will receive a set monthly amount from that point until the end of the life of the policy.

Policyholders choose how long they want the term to last. For example, this might match the remaining amount of time that’s left to run on your mortgage, until you expect your children to leave home, or up until your retirement.

While family income benefit is suitable for individuals with dependants, for example, partners or children, there’s not much point buying this sort of cover if you’re single and don’t have kids.

Decision time

When you take out a family income benefit policy, you decide what level of income you want your family to receive, and over what time period. For example, this might be a policy that lasts 20 years with an agreed payout, should it be needed, of £2,000 a month.

The insurer will then calculate the monthly premium you need to pay. The larger the monthly payout, the more you can expect to pay in premiums.

Because there’s a sliding scale element to family income benefit, with the number of potential payouts reducing the longer a policy runs, it tends to cost less than term life insurance which pays out the same amount regardless of when that payout is triggered.

How to buy family income benefit?

If you decide that family income benefit is the right type of protection for your family, you can shop around online and compare different insurers and products before choosing a policy.

Factors that will affect the premiums you pay include:

  • age

  • lifestyle, such as whether you drink or smoke

  • diagnosis of any pre-existing medical conditions

You will also need to consider:

  • the size of the monthly payment required

  • the length of the policy’s term

  • taking out either a single policy, or opting for a joint policy with your partner

  • if, for an extra fee, you want to add critical illness cover to your policy

Note that while a joint family income benefit policy covers two parties, it will only pay out once (usually after the first policyholder has died). This means it’s unlikely any life cover would remain in place for the surviving partner. If required, critical illness cover is a form of financial protection that pays out on the diagnosis of particular illnesses such as cancer, or following medical emergencies such as heart attacks and strokes.

Payout numbers can vary

Payouts from a family income benefit policy are only made during the remaining life of the policy after a claim has been made. The later a claim is made during the policy’s term (if a claim needs to be made at all) the fewer the payouts your family would receive as a result.

For example, if you took out a policy with a 20-year term and you died after eight years, then your family would receive monthly payments for the remaining 12 years. Die after 19 years, however, and payments would last only a year.

Bear in mind, also, that if you’re still alive when you reach the end of the term of your family income benefit policy, there’s no payout at all and no monies to be recouped.

Index-linked policies

Because inflation erodes the value of money, it’s possible to ‘index-link’ a family income benefit policy at the time of taking it out to ensure that the payouts you’ve stipulated keep in line with the cost of living over time.

An index-linked family income benefit policy costs more than one that doesn’t offset the effects of inflation, but ensures that future payouts would rise each year.

When taking out a family income benefit policy, you’ll also be asked whether you want your premiums to be ‘guaranteed’ or ‘renewable’. Guaranteed premiums stay the same for the life of the plan. By contrast, renewable premiums may start cheaper, but can increase over time if your provider decides to make adjustments along the way.

Why take out family income benefit?

It’s always important to buy insurance that best meets your specific needs. This is especially the case when taking out cover that will potentially provide financial protection to your nearest and dearest. You should consider taking out family income benefit because:

  • It offers financial peace of mind to remaining family members should you die

  • Monthly payments make it easier for remaining family members to budget and pay the bills

  • Payments are made tax-free

  • Policies can be tailored time-wise to suit your circumstances

  • Policies can be taken out as individual or joint cover

  • It can be cheaper than life insurance

  • Index-linking a policy helps counteract the effects of inflation.

  • Critical illness cover can be added to a policy (for an extra fee).

Downsides

By the same token, family income benefit won’t necessarily suit everyone. Especially singletons without children. This is because policies:

  • Offer cover on a decreasing scale so tend to pay out less than life insurance

  • Provide a regular income when called for, but there’s no lump sum payment

  • Can be cancelled if you stop paying the premiums

  • Written on a ‘joint’ basis only pay out once after the first death

  • Not index-linked are unlikely to keep pace with inflation in terms of payouts.

  • Worth higher levels of protection means higher premiums

  • That remain unclaimed means there’s no money to be recouped by the policyholder

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