What is family income benefit?
3 Jun 2020
If you are a busy parent, chances are you’ve not had much time to stop and think about life insurance. We are well aware that it’s not exactly the most exciting thing to fill your free time with and is probably something that continuously gets demoted down your ever-growing to-do list.
It’s time to stop procrastinating though, and time to consider the life insurance product that is going to be best for you and your family. And perhaps, that product is family income benefit.
What is family income benefit?
In the majority of family households, at least one regular salary is relied on to cover the bills, mortgage repayments and household spending. But what happens if one of these main providers passes away or gets diagnosed with a serious illness? This is where family income benefit comes in.
Family income benefit differs from traditional life insurance as it doesn’t pay out a lump sum to the beneficiaries upon a claim. Instead, it provides a regular tax-free income, either monthly or quarterly, to cover household and living costs. Whether the family is suffering a loss or a main earner has been diagnosed with a serious illness, family income benefit relieves financial stress and ensures that you’ve still got some money coming in to keep things afloat when times are hard.
Many people are attracted to family income benefit over (or as well as) products such as life insurance because of the regular payments. Receiving the payout money in this way means that no one is left to deal with a large and overwhelming sum of money. The cash in the bank is manageable and budgeting becomes simple.
How exactly does family income benefit work?
When you take out your family income benefit policy, you can decide how long you’d like your policy - or ‘term’ - to last. As a parent, it’s probably a good idea to opt for this to be the length of time until your children are financially independent; so perhaps 15-18 years. You could also opt for it to last until your mortgage is paid off, and you’re left with more disposable income each month.
This product 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 claimed a month into this term, the payments would begin from the date of the claim all the way through to the end of the term. If you claimed 20 years into the term, the payments would again begin from the date of claim but only pay out for two years, because this is what is left of the term. Make sense?
Is family income benefit expensive?
Family income benefit is generally cheaper than life insurance but as with most insurance products, monthly premiums differ from person to person. The price of premiums are based on your age, the annual income chosen as a payout and if you’ve ever smoked or have any existing health issues. Anything that will decrease life expectancy or be seen as a risk will increase your monthly insurance premiums in some way.
You can get a joint policy between you and your partner and although this is the cheapest way to be covered by family income benefit, it might be a good idea to look at taking out two single policies - particularly if you and your partner are both household earners. Having two single policies would result in two seperate payouts if mum and dad were to both have to be claimed for during each term. It’s certainly worth considering, providing it doesn’t make things too expensive.
You can also opt for your family income benefit to keep up with the rate of inflation. Living costs are always on the rise so the amount of money that your family could comfortably live on at the start of your policy may not be enough in 20 years time when you hypothetically come to claim. You can factor inflation into the annual payout amount that you decide on, or link your policy to indexation which means that it’ll be increased automatically.
Family income benefit vs life insurance
You might be weighing up the pros and cons between family income benefit and term life insurance. If you were to take out term life insurance, it would pay out the full amount no matter how far along into the policy term you are, unlike some other insurance products. Because it gets paid in a lump sum, life insurance is great for covering large costs such as paying off a mortgage.
With family income benefit, the monthly installment that is to be paid to your loved ones doesn’t change, but for every year that you do not claim, less money overall will be paid out. This product isn’t suitable for covering large costs, such as paying off your mortgage… it’s designed to cover household and living costs; food on the table, petrol in the cars, school uniforms can be purchased and perhaps driving lessons paid for to get the children on their feet when the time comes.
For these reasons, family income benefit and life insurance also go very well together. With a life insurance policy to cover your bigger costs and family income benefit to cover living costs, you’ve got all bases covered.
Let LifeSearch help
As a parent, all you want to do is protect your children, right? We know you’re always there to wipe their tears when they are upset, to kiss their bruises when they fall - but having the right life insurance in place is the ultimate protection. Family income benefit is a huge security blanket for many to ensure that family finances continue to tick over when times get hard.
Although we’ve given you a general overview and explained what choices you might have to consider to meet your needs, when discussing cover options with your adviser they can make a recommendation based on your individual needs, and our protection advisers can help you with that.
If you want to know more about family income benefit or how to combine it with a life insurance policy, get in touch with us for fee-free advice and quotes from the UK’s leading providers. Any question - big or small - we’re happy to answer. Don’t put it off any longer!
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This article may be reviewed for quality and training purposes