Why you should consider Family Income Benefit
If you’re in the market for life insurance, you may have come across family income benefit insurance.
Almost a hybrid of life insurance and income protection, it’s a product which can be beneficial to those with a young family who are on a budget.
Despite its merits, it’s not as widely known as the above two insurance policies.
If you’re seeking financial protection for your family’s living costs, if you were to pass away, it’s worth considering this cost-effective alternative form of life insurance.
But what is family income benefit?
Essentially, family income benefit is a type of life insurance. However, instead of your family receiving a lump sum payment if you pass away, they’ll receive a tax-free monthly income.
Like income protection, the monthly instalments can be used to substitute your income – allowing your loved ones to sustain their current lifestyle. Instead of the policy holder making a claim if too ill or injured to work, family income benefit can only be claimed by your loved ones once you pass away.
The sum assured (monthly benefit) is agreed upon during the application process and can stay level (remain the same) or increase with the Retail Price Index (RPI).
Similarly, premiums can either be guaranteed, or reviewable – potentially increasing over the policy term at the discretion of the policy provider.
How does it work?
Once you’ve agreed upon the amount of cover required and your policy is in place, you’ll pay a monthly premium to cover a set period.
If you were to pass away within this period, your family would start to receive monthly payments as a replacement to your income.
Your family will receive the benefit for the remainder of the term. For example, if you took out a policy with a 40 year-term and passed away 10 years into the policy, your family would receive monthly income payments for the next 30 years – as long as all premiums were paid up until you’d passed away.
To make a claim, your family will need to contact your policy provider upon your passing. Once a claims form has been returned and the claim has been deemed successful, payments commence.
Depending on the provider, the monthly benefit amount could be up to £5,000 and the policy term (length of policy) can be up to 40 years. However, the amount and length are determined by you during the application process.
Who exactly is family income benefit for?
Anyone over 18 is eligible to take out a family income benefit policy. However, it’s most beneficial for those who have young families, who want a cost-effective way of protecting their current and future living costs.
If your family would struggle with budgeting a large lump sum, or don’t require a significant single sum to cover big debts, family income benefit can help make things more manageable.
Is it better than other products?
Family income benefit isn’t better or worse than life insurance or income protection. What’s important is whether it’s the best option for you and your unique circumstances.
If you have a young family and you’re worried about their financial security, if you were to pass away, then family income benefit can be an attractive policy help with long term family budgeting.
Life insurance can provide a cash lump sum, which could cover the cost of a mortgage or your funeral. However, only one lump sum is given to your loved ones, often used to clear a mortgage debt and/or cover future living costs.
Income protection is a great choice if you’re worried about becoming too ill or injured to work. Like family income benefit, a monthly income is received which can substitute a percentage of your earnings (usually between 50% – 70% depending on the provider). However, if you were to pass away, your family wouldn’t receive anything.
So, if you’re looking for a policy which covers your family if you pass away and pays out in monthly instalments, rather than one lump sum payment, family income benefit could be a great option.
It’s also worth noting that, due to paying out in monthly instalments, family income benefit is not subject to income tax (unlike life insurance).
Ok, so what should I consider when applying?
There are three key factors you should consider when taking out family income benefit:
- What you need to cover?
- What the monthly payment benefit should be?
- How long your policy term should be?
Whilst you may know this policy is to cover your family if you pass away, what exactly do you want to cover financially?
Mortgage or rent payments can be a priority for those who want their families to maintain the family home. But the day-to-day cost of living, utility payments, childcare and other factors should all be considered.
It’s important to look at your monthly spending and financial commitments. Your family are likely to need at least this covered per month if you were no longer around. However, also consider future requirements such as additional childcare, higher education costs and the impact of future inflation (particularly significant at this time).
Leading life insurance broker Reassured.co.uk have a handy family income benefit calculator, to help you establish your required cover amount.
If you’re not around, there’s only one parent to look after your children, which could mean additional financial help is required.
You’ll also want to look at your required length of cover. If your sole intention is to cover your mortgage, and you have twenty years of payments remaining, your policy length should reflect this. Similarly, if you want to ensure your children are financially covered until they turn 18, secure a policy that lasts until then.
Finally, consider how much you can afford to pay in premiums and whether you have any additional cover in place. There’s little point in taking out a policy you cannot afford, as you risk having it invalidated if you’re not up to date with the premiums.
You may also have employment which offers a death in service benefit or be fortunate enough to have savings. By considering how much cover your family already have, you could potentially have a smaller family income benefit policy and, therefore, save money on the cost of premiums.
How are my premiums determined?
Similar to other life insurance products, your premiums are calculated through using key information.
Your age, smoking status, medical history, weight/BMI and occupation all play a role in determining your premiums.
Essentially, the insurer wants to know how much risk you pose to them (the likelihood of a claim being made) so they can provide you with appropriate policy terms and pricing.
It’s essential to provide accurate information. Providing false details or withholding information is called “non-disclosure” and will lead to your policy being invalidated.
Unlike life insurance, premiums aren’t necessarily guaranteed. You also have an option of reviewable premiums, which your provider has the right to increase over time.
Your policy should be one that has the right amount of cover to meet your individual requirements, that is at a price within your budget.
Should I take out a joint family income benefit policy?
While it’s certainly plausible to take out a joint family income benefit policy, there are advantages and disadvantages to doing this.
This is a good way to save money as both parents can be covered on the same policy with just a single premium to pay.
However, policies will only pay out when the first policy holder passes away. After this the policy will expire, meaning no additional claims can be made on the policy and the surviving parent will no longer be covered.
It’s also important to consider that, as information will be required about both parents, if one is considered to be more high risk, the overall premium will reflect this – meaning one parent could being paying more than is necessary.
For example, if one parent is older, smokes and/or has a pre-existing medical condition this will increase the shared premium price.
Taking out two single policies may result in paying two premiums, but it could also provide two sets of monthly payments.
It’s therefore worth establishing if a joint policy would be beneficial and save you money in the long term.
I’ve decided – this is what I need. How do I apply?
The best way to secure family income benefit is by using a life insurance broker like Reassured Advice. The most important reason for this is they can compare a range of quotes from the whole of the market, saving you time. If you know the policy type you require and your cover amount then you could also use a reputable comparison website.
By doing this, they can find the best possible deal, personalised to your individual requirements – whether that’s family income benefit, life insurance or income protection. Quotes are fee-free, no-obligation and start from as little as 20p-a-day.
Reassured Advice can support and guide you through the whole application process, while helping you make an informed decision about your requirements.
Anything else I should know?
If you’re unsure about exactly what you need, it’s still worth contacting an FCA-regulated broker.
Life insurance brokers can provide additional information to help you make an informed decision about what cover is best for you. They can also provide someone for you to bounce ideas off, helping you determine what you require.
Once you’re covered, you can relax, knowing your family’s financial future is protected.
