What is Family Income Benefit?
If you have a young family who rely on you financially, Life Insurance can provide valuable peace of mind. It gives you the reassurance, that should you pass away, your family wouldn’t struggle financially. Most Life Insurance policies will pay out a lump sum to your family (or other beneficiaries) in the event of your death. A Family Income Benefit Insurance pays out a monthly income instead, for the rest of the duration of the term of the policy.
The income benefit can be used to pay the usual bills which your income would have previously covered, such as the mortgage, household bills, food and clothing expenses.
How Does it Work?
You set the amount of cover at the outset – so you choose the amount of monthly income your family would need if they could no longer rely on your income. You also choose the term of the policy, which is the duration for which the policy will last. So for example you could set the policy to last 20 years, whilst your children grow up and for the duration of the mortgage. The income benefit would be paid to your family from the point you pass away and they make the claim, to the end of the term. So for example if you were to pass away 5 years into a 20 year term policy, the income benefit would be paid to your family for the remaining 15 years.
Who Is Family Income Benefit Suitable For?
Life Insurance is not a legal requirement, but if you have a young family who relies on you financially, it’s vital you have a backup plan if the worst were to happen. Think about how much money your family would need, to maintain their current standard of living if you were not there to provide for them with your salary. If these costs cannot be covered by savings; then Life Insurance could be the answer.
Managing a large sum of money from a more typical Life Insurance policy can be overwhelming and challenging for some families who have just lost a loved one. Family Income Benefit can be a more budget-friendly, manageable option for some. There isn’t the need to worry about long-term budgets or investing in the stock market for example. Your family could just continue to pay the bills with a suitable income each month.
It’s never a nice thing to think about and subsequently many people put it off. But according to Child Bereavement statistics:
“A parent of children under 18 dies every 22 minutes in the UK; around 23,600 a year. This equates to around 111 children being bereaved of a parent every day.”
When Is a Family Income Benefit Not Suitable?
Family Income Benefit doesn’t have the option of paying off the whole mortgage in the same way you could with a lump sum pay-out from a regular Term or Whole of Life Insurance policy. Whilst you would still be able to pay the mortgage payments every month, the surviving partner would still have to deal with the administration and handling re-mortgaging.
The pay-out amount your family receive with a Family Income Benefit could be much lower than the lump sum they would receive from a Term Life Insurance policy or a Whole of Life policy, depending on when the claim is made. For example if you had a £100,000 cover with a Term Life Insurance policy or a Whole of Life policy, your beneficiaries would receive that whole amount as long as you died within the term of the policy. With a Family Income Benefit policy however, they would only receive the monthly income for the remaining duration of the term. This could therefore be significantly lower if the claim was made towards the end of the term, instead of the beginning.
How Much Is Family Income Benefit?
Family Income Benefit is usually seen as a very budget friendly type of Family Life Insurance. Premiums vary though, depending on the amount of cover you require, the length of the term and your circumstances. The bigger the income benefit you want your family to receive, the more the premiums will be. Circumstances you can’t change could also vary the premium, such as your age, your current health and if you smoke or not.
Joint or Individual Family Income Benefit
In the same way any other Life Insurance policy can be joint or individual, the same is true for a Family Income Benefit policy. With a joint policy, the income payments would only pay out once, usually on the first policyholder death. If both parents died in the duration of the term of the policy, there would only be one income benefit paid, but a joint policy is cheaper than two individual policies.
Future-proofing your policy
There are two longterm things to consider when taking out a policy. The first is the opportunity to guarantee your premiums. This means that the monthly premiums you pay are guaranteed to remain fixed for the duration of the policy. Alternatively, you can opt for reviewable premiums, which might cost less initially, but will be reviewed on a regular basis and may be increased. The second is inflation. With the cost of living rising continuously, the income benefit your family receive, may have to stretch further if the cost of living has increased, but the income benefit hasn’t. It is possible to link the value of the monthly pay-out to increase with inflation. This will probably increase your premiums from the outset, but will avoid any shortfall.
Other Types of Family Life Insurance
If a Family Income Benefit might not suit you, the following are alternative types of Family Life Insurance which pay out a lump sum, instead of an income benefit.
Term Life Insurance is taken out for an agreed term, for example 10, 20 or 30 years, to cover the specific period of time in which it is needed. This type is popular as a family policy, because it can cover the time you are raising your children. It is the most affordable way to buy life insurance, but only pays out if you die during the term of the policy.
Whole of Life is quite different in that it covers your whole life and does not expire, assuming you continue to pay the premiums. It is designed to protect funeral costs, inheritance tax liabilities or to leave some money to your family when you pass. It is concerned more with covering the liabilities that are sure to arise on your death, regardless when that might be.
Level or Decreasing Life Insurance?
The two most common types of Term Life Insurance are Level Life Insurance and Decreasing Life Insurance.
Level Life Insurance
Remembering that Term Life Insurance policies last for a set number of years – Level Cover requires the same premium and provides the same lump sum to leave behind, if you die at any time throughout the term.
So if you chose a level of cover of £150,000 for example, and a term of 20 years, if you die at any point during that 20 year period, your family would receive the £150,000 lump sum.
Level cover is ideal for:
- Protecting your family to allow them to maintain their standard of living
- Covering your salary when you’re not there to provide it for your family
- Paying off an interest-only mortgage, so your family can continue to live at home
- To pay school or university fees for your children
