How Does Family Income Benefit Work
22 Apr 2019
Family Income Benefit is different to other life insurance policies in that it doesn’t pay out a lump sum to the beneficiaries should the insured person pass away. Instead, it provides the beneficiaries with a regular tax-free income, either monthly or quarterly, to cover household and living costs when the main earner is no longer around.
How does Family Income Benefit work?When you take out a Family Income Benefit policy, you choose how long you want your term to last. For young families, this could be until the children are financially independent and would no longer need the income payments.
Family Income Benefit is slightly different to other products, in that the risk to the insurer decreases with every year that there isn’t a claim. Let’s say for example you choose to have a 23 year term. If you died a month into this term, the payments would begin from the date of death all the way through to the end of the term. If you died 20 years into the term, the payments would again begin from the date of your death but only pay out for 2 years, because this is what is left of the term.
Who is best suited to Family Income Benefit?It’s perfect for new parents with young children looking for that extra peace of mind and protection. The regular payments as opposed to a lump sum payout means that no one is left to deal with a large, overwhelming sum of money, such as with a traditional Life Insurance policy. Losing a loved one is hard enough, without then having to suddenly deal with a huge amount of finances. This way, the money is made manageable and budgeting becomes simple.
How is Family Income Benefit different from Life Insurance and Income Protection?With term Life Insurance, it not only pays out a lump sum but it will also pay out the full amount no matter how far along into your term you are. You could pass away one day into your term, or the day before your term expires and it would make no difference to the payout amount. With Family Income Benefit, the monthly instalment that is to be paid to the beneficiaries doesn’t change but for every year that you do not claim, less money overall will be paid out.
This insurance product isn’t suitable for covering large costs, such as paying off a mortgage. It’s designed to cover only living costs but if you wanted to cover all bases, take it out alongside a Life Insurance policy which will pay out a lump sum.
If you’re thinking that Family Income Benefit sounds pretty similar to Income Protection Insurance, then you’d be right - but they are in fact two very different products. The big difference is that Income Protection covers you if you become ill, injured or disabled and can no longer work and earn money, be that short term or long term. Income Protection will replace your earnings so that you can still pay your bills and get by. Family Income Benefit on the other hand, will never pay out whilst you’re still alive unless you take out Critical Illness Cover alongside it, which will pay out should you become seriously ill.
How much does Family Income Benefit cost?Family Income Benefit is cheaper than Life Insurance but as with most insurance products, monthly premiums differ from person to person. This could be down to age, the annual income chosen as a payout and if a person has ever smoked or had health issues. Understandably, anything that will decrease life expectancy will increase the monthly insurance payments.
Although joint policies are available, if there are two main earners in the family (mum and dad for example), it might be a good idea to look at taking out two single policies. Providing that it doesn’t work out as too much more expensive, having two single policies would result in two separate payouts if mum and dad were to both pass during each term.
There’s also the issue of the rise in living costs to combat. The amount of money that a family may comfortably live on at one time is probably not going to be enough 20 years later. When deciding on your payment amounts, make sure you factor in inflation or link your policy to indexation, which means it‘ll be increased automatically.
What can LifeSearch do to help?Death is not something that anyone wants to think about or consider happening anytime soon, especially if you have just started a young family. However, protecting the ones you love is always worth thinking about. Family Income Benefit is a huge security blanket for many to ensure that family finances continue to tick over when you’re not around.
If you want to know more about Family Income Benefit, get in touch with our award-winning team for fee-free advice and quotes from the UK’s leading providers. We’re here and happy to answer any question, no matter how big or small, to give you peace of mind.
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