How Does Family Income Benefit Work

How Does Family Income Benefit Work

13 May 2022

How Does Family Income Benefit Work

What is Family Income Benefit?

Family income benefit is a life insurance policy that pays out fixed regular payments (not a lump sum) if the policyholder dies.

Tax-free payments are made (usually monthly but it could be quarterly or annually) so surviving family / beneficiaries effectively keep an income coming in. That way, they can stay on top of regular household outgoings going forward.

Regular tax-free payments are made (they're usually monthly but can be quarterly or annually) so surviving family / beneficiaries effectively have a reliable income to cover household outgoings going forward.

Depending on your needs and home life, you may prefer the idea of leaving regular consistent payments versus a large, one-off lump sum.

But that doesn't mean it's one or the other. Life insurance policies can be built to complement each other so it's quite common to arrange a lump-sum policy (to pay off a mortgage for example) as well as family income benefit for those regular payments.

For more, click through to What is family income benefit?

What are the benefits of Family Income Benefit?

The key benefit is how practical it is. If a breadwinner were to pass away then their income would disappear. Family income benefit essentially replaces it for a predefined period of time so that the surviving family can budget and spend as normal. That's an easier ask than parcelling up and indefinitely managing a one-off lump sum life insurance payment.

Also important - family income benefit can be more affordable than lump sum life insurance.

Here's a little more on family income benefit.

What are the disadvantages of Family Income Benefit?

Life insurance lump sums often go towards paying off a mortgage but family income benefit won't stretch to that. Instead it pays regular smaller amounts to keep the household functioning almost as normal.

Like level term life insurance, family income benefit runs for a specific time period. Unlike level term life insurance (which pays out the same whether you die on day one or day 10,000 of your term), family income benefit decreases over its term. So if you die 15 years into a 20 year term, family income benefit will pay out for five years only.

On a similar note, family income benefit isn't a savings or investment product so if no-one claims during its term it won't pay out at all ... but then the obvious flipside of that is that the policyholder's still alive.

How does Family Income Benefit work?

You'll select how much you'd want your family / beneficiaries to receive each month, which is most likely a calculation based on your current wage and household running costs. You'll then select a term for your policy - perhaps as long as your children are financially dependent, or as long as you're still paying a mortgage.

LifeSearch can advise you on all of the above as the scope of your policy is defined by your situation, needs and budget.

So based on those things, you'll pick a policy and pay premiums every month. If you pass away during your term, your family / beneficiaries will receive the agreed amount tax free each month (or quarter or year) until the policy term is up.

What are the benefits of Income Protection?

Income protection pays out a significant portion of your wages (typically 50-70%) during any periods you're signed off work by a GP due to sickness or as a result of injury.

Many employment and contract types don't come with sick pay - if you're self-employed you may not even be entitled to statutory sick pay of circa £100 per week - so this is where income protection can help.

Even if you have sick pay, you can arrange for income protection payments to kick in once your employer sick-pay-period ends. This way you're covered with a wage for any extended periods of absence.

Income protection is also beneficial in that you can - depending on your agreed claim period -- claim on it multiple times, for as long as you need each time, throughout the policy's life.

Click here for our quick guide to income protection

What is the difference between Family Income Benefit and Income Protection?

It's a good question to ask as they may appear similar. The key difference is that family income benefit is paid to your family / beneficiaries if you die. Income protection is paid to you while you're sick and off work.

Here's some info and FAQs about income protection.

What is the difference between Family Income Benefit and Life Insurance?

There are two key differences. The first is that life insurance pays a big lump sum once while family income benefit pays regular small amounts until the end of the policy term.

The second concerns the policy term. In a 20-year level term life insurance policy, the lump sum amount stays the same whether you die on day 19 or in year 19. But with family income benefit, the amount payable decreases.

For example, if you have a 20-year family income benefit policy and you die after 19 days then your family gets regular payments for the next 19 years and 11 months.

If you die after 19 years, your family will only be entitled to one year of payments before the policy comes to an end.

What are alternatives to Family Income Benefit?

  • Level term life insurance

There are different types of life insurance. Level term is where the amount that's payable doesn't change. If your policy is for £100,000 - your family will get that whether you die on day 5 or day 5,000 during your term.

Give this a click for our quick guide to life insurance.

  • Decreasing term life insurance
Decreasing term life insurance is slightly different from level term. It's usually based on the life of a mortgage so the payable amount (the lump sum) decreases as you pay off more and more of your house. Your premiums reduce in cost over time too, so it can be a more economic way to go than level term, where premiums stay the same always.

It's always worth having an expert guide you on the best life insurance for you so speak with a LifeSearch adviser if you're at that stage in your journey.
  • Income protection
Family income benefit pays a 'wage' of sorts to your family if you die. Income protection pays a wage to you if you're unable to work/ earn due to sickness or injury.

One income protection policy can be used again and again. Each time you claim, payments continue for as long as you need until one of four things happen: you return to work, you retire, you pass away, your policy expires.

Here's more on how income protection works.

Who is Family Income Benefit for?

Family income benefit is a good choice for:

  • Young families where a regular income would be more practical than a lump sum should the worst happen. It'll probably work out cheaper than buying a lump sum life insurance policy too.
  • Single parents who want to maintain a certain wage / standard of living in the house. The benefit can be paid to a guardian to help cover bills, clothes, hobbies, food etc.
  • Carers who want peace-of-mind that regular costs for their loved one's bills, medicine, support services etc will be met if they were to pass away.

Should Family Income Benefit be written in trust?

Yes - to speed up the time it takes between a claim and payments starting.

Putting a life insurance policy into trust locks it outside a deceased policyholder's estate so as to avoid inheritance tax.

Although family income benefit wouldn't be consolidated into a dead person's estate (therefore it wouldn't be subject to inheritance tax) putting it in trust will still help to bypass probate and speed up payment.

Here's more on putting policies into trust.

How much does Family Income Benefit cost?

It depends on your health, lifestyle and how much you want to be paid into the household coffers each month. But the bottom line is that it's very affordable.

A 31-year-old non-smoker who wants £700 to be paid to their family each month on a 20-year term will pay £5 in premiums per month*.

If that same person wanted £1,500 paid to their family each month on a 25-year term they'd pay £9.45 in premiums per month*.

*LifeSearch data, correct as of April 2022.

How long does Family Income Benefit pay out for?

Until the policy's 'term' expires. Every family income benefit policy has a term time, a length of time it will last, as chosen by the policyholder.

If the policyholder dies on year one of a 20 year policy, the family will receive 19 years of regular payments. If the policyholder dies in year 19 of a 20 year policy, the family will receive just one year of regular payments.

How are the benefits from a Family Income Benefit plan taxed?

Easy answer - they're not. Family income benefit payments are completely tax free.

Life insurance exists to protect you. And no two people are the same. The best policy for you depends on where you are, what's going on at home, your health, your plans, your needs and your budget.

LifeSearch work with a wide range of top insurers so we can find perfect protection for unique you.

Reach out and we can start you on your journey.

LifeSearch compare quotes from all major UK insurers. Advice offered is free and all quotes given are without obligation. LifeSearch Limited is an Appointed Representative of LifeSearch Partners Limited, who are authorised and regulated by the Financial Conduct Authority. Calls may be monitored/recorded.

*Prices where indicated in adverts are based on the below criteria, as of 12/07/2022. Prices quoted may vary depending on your own individual circumstances including age, medical history, the sum assured, length of policy - and other variables.

Life Insurance from £5 per month:
29 year old female client- non-smoker- level term assurance £107,020 over a 25 year term - £5pm

Family Income Benefit from £5 per month:
31 year old Male client- non-smoker- looking at £706 to be paid each month over a 20 year term - £5pm 

Critical Illness Cover from £10 per month:
25 year old male client- non-smoker- level term critical illness £52,200 over a 20 year term- £10pm

Mortgage Protection Insurance from £5 per month:

35 year old female client – non-smoker- decreasing £80,000 over a 35 year term- £5.35

Income Protection Insurance from £10 per month:
25 year old male client- non-smoker- admin assistant- 3 month deferment period- £1,452  to be paid out each month for a maximum of two years per individual claim- covering him up to the age of 68- £10pm  

Over 50s Insurance from £10 per month:
50 year old male client- non-smoker- over 50’s plan to pay out £3,264 for £10pm
65 year old male client- non-smoker- over 50’s plan to pay out £1,853 for £10pm 

Joint Life Insurance from £5 per month:

29 year old male and female - non-smokers - Joint Level term life insurance to pay out £48,263 over 20 years- £5pm

 

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LifeSearch Limited is an Appointed Representative of LifeSearch Partners Limited, who are authorised and regulated by the Financial Conduct Authority. Calls may be monitored/recorded.