What is family income benefit insurance?
Family income benefit is a special type of life insurance policy.
Generally, with life insurance, your loved ones will receive a lump sum payout from your policy when you die. It’s then up to them to handle that money as they wish.
With family income benefit, your loved ones will instead be paid a regular income for a set period.
How does family life insurance work?
When you take out a family income benefit policy, you stipulate what income you would need your loved ones to receive, and over what time period. The insurer will work out what monthly premium you would need to pay in order to secure that cover.
At the outset, figure out what sort of income would be needed your family to be financially stable should you pass away.
Let’s say that your family would need £2,000 a month for the next 30 years in order to be secure were you to die.
If you died in the first year of the policy, the insurer would pay out that sum for the full 30 years of the policy, while if you died in year 25, they'd receive £2,000 a month for the final five years.
If you die after the term of the policy has finished, there will be no monthly payout to your loved ones.
How much will family life insurance cost?
Family income benefit is generally seen as the most budget-friendly form of life insurance available.
This is because the insurer is less likely to have to pay out a significant sum, and even if they do they won’t need to pay it all in one go.
In comparison, a term life insurance policy pays out entire sum agreed should you die during your term, no matter whether that’s during the first year or the last, while a whole-of-life insurance policy guarantees that there will be a payout at some point.
However, the actual cost of a policy will vary based on issues including your health and lifestyle, your age and what size income you would want the policy to pay out.
Who is family life insurance suitable for?
Managing a large lump sum can prove a real challenge for families who have just lost a loved one. If they want to make the money last for a lengthy period, this will involve a lot of budgeting and most likely investing in the stock market.
Furthermore, the loss of a parent can create additional costs, such as a greater need for childcare.
Dealing with all of this can be a complex process at the best of times, let alone when you are grieving.
As a result, family income benefit will appeal to those who want to ensure that should they pass away their loved ones enjoy a simple, regular income. This should make it much easier to handle the budgets and keep on top of paying the household bills.
And as you determine the term of the policy, you can make sure that the income lasts for the most appropriate length of time.
This might be up until you plan to retire, or when you expect the children to be financially independent.
Getting professional financial advice can help you figure out what type of cover is right for you and your family. Which? Insurance Advisers can help - call them for a free consultation on 0808 2912 844.
Who isn’t family life insurance suitable for?
Many people take out a life insurance policy so that if they die during the term of the cover, their loved ones will be able to pay off the mortgage in one go and enjoy outright ownership of the family home.
That isn’t an option with family income benefit. While the monthly payment may be enough to cover the mortgage bill each month, it will likely take many years to pay off the home loan entirely.
This will mean that the surviving partner will be left to handle decisions over things like when to remortgage.
Over the course of the policy, the payout that your loved ones would receive will fall significantly. Taking our example above, if you died in the last year of the policy, your loved ones would only receive a total of £24,000.
If you want to ensure that your family receives a more substantial payment, no matter when you die during the course of a life insurance policy, you will be better off with a term life insurance or whole-of-life insurance policy.
Can I get a joint family income benefit policy?
Family income benefit is available both on an individual and on a joint basis.
If you go for a joint policy, there will only be one set of income payments, usually after the first policyholder dies, so long as they die during the term of the policy.
As a result, while two individual policies will be more expensive than a joint family income benefit policy, separate policies would ensure that there are two sets of income payments should both parents die during the term of the policy.
Are my premiums guaranteed on a family life insurance policy?
When you take out family income benefit, you will usually be given a choice between guaranteed and reviewable premiums.
With guaranteed premiums you will know for certain exactly what your payments will be for the entire term of the policy - they won’t ever change.
With reviewable premiums, while they may cost less initially, the insurer will review them on a regular basis and may choose to increase them. As such, there is a danger that they may become unaffordable at some point.
Are my family income benefit payments index-linked?
Inflation is an important thing to consider when working out what sum your loved ones would need to get by each month should you pass away. With the cost of living constantly rising, the money they receive may need to go further as the years pass.
You have to option to increase the value of your family income benefit with inflation to ensure that the value of the monthly payout meets rising costs. This will likely increase the cost of your premiums at the outset.
Can I write family life insurance in trust?
All life insurance policies can be written in trust, including family income benefit. This is a legal arrangement, that is absolutely free, and essentially means that the policy is viewed as being outside of your estate when you pass away.
This should mean that your loved ones receive the money quicker, as it sidesteps the probate process.
Find out more in our guide to how to write life insurance in trust.