What is family income benefit insurance?
Family income benefit (or ‘FIB’) is a type of life insurance, however, unlike traditional policies that pay out a lump sum, family income benefit provides beneficiaries instead with a regular, fixed, tax-free income.
Regular income payments run from the date of death, until the end of the policy term, as chosen at the outset by the policyholder. No benefit is provided if a claim has not been made before the policy expires.
Family income benefit can be well suited to new parents with young children, who want an affordable way to ensure their dependants are adequately provisioned for. A regular income can also help with long-term budgeting.
This type of life cover is generally very cost effective because the risk to the insurer reduces each year and they are not guaranteed to pay out, (unlike whole of life insurance).
Another advantage of family income benefit is it does not require beneficiaries to budget, manage, invest a large sum. This can involve complicated investment decisions, that incur fees/taxes, at a time when you are grieving.
How does a family income benefit plan work?
Before you buy family income benefit, you need to establish how much income your dependents require each year. Ideally, this would cover all living costs, not just now but in the future.
Then you need to decide how long you require the cover to last, (known as the ‘term’). Often policyholders ensure the term lasts until their children are financially independent.
Normally this tax-free income is paid monthly, although it can be paid quarterly. This can help with the long-term budgeting for day-to-day living expenses.
Why is family income benefit cheaper?If you pass away halfway through a family income benefit term, the number of monthly payments your family receive is just half the maximum.
In contrast, level term or whole of life cover pays out the full sum assured, regardless of whether the policyholder dies 1 week or 25 years into the term.
As the risk to your insurer decreases each year, as with decreasing term cover, the cost of FIB policies remains low in comparison with other lump sum life cover.
As with all life insurance cover, the cost will depend on a number of key factors. Most notably, age, the annual income you want paid out, the term length and your health/lifestyle.
Family income benefit vs standard life insuranceLife insurance pays out a lump sum when the policyholder dies, whereas family income benefit provides a regular tax-free income. However, it does not have to be a case of one, or the other – you can secure multiple policies.
Subject to budget, you may decide to take out standard life insurance, that pays a lump sum for larger one-off costs, (like paying off the mortgage), alongside a FIB policy, which provides your dependents with a steady income for day-to-day living costs.
Both options provide protection and security for your loved ones, and it is a case of weighing up the type of the cover you need and what you can afford.
Family income benefit vs income protectionAlthough family income benefit and income protection sound very similar, they are in fact two very different policies.
Family income benefit only pays beneficiaries after the policyholder dies, whereas income protection policies protect their income if they are alive, but unable to work due to an illness or accident.
Please note, we do not currently sell income protection policies at Reassured, although we do sell family income benefit cover.
Family income benefit with critical illness coverMost family income benefit policies can be extended to also include critical illness.
This means your family could start benefiting from the cover, in the event you were no longer able to work because of falling critically ill.
However, adding a critical illness element to your policy cover is likely to result in paying higher monthly premiums.
Can I get joint cover?Yes. Family income benefit is often bought on a joint basis. Income payments on a joint policy will start from the passing of one of the policyholders, usually the first, but not both.
However, it may only be slightly more expensive to take out two single policies. This could represent better value, as it would mean two separate pay outs if both mum and dad were to die during the term.
Guaranteed or reviewable premiums?When you take out family income benefit, you have a choice of either guaranteed or reviewable premiums.
If you choose a guaranteed premium, your insurer will not change the monthly premium price. You always know what you have to pay throughout the policy term.
Whereas, reviewable premiums normally cost less initially, however, your insurer has the power to increase the cost at intervals during the term.
The rising cost of livingYou will have worked out the level of cover you need to maintain your family’s standard of living, at the time of setting up the policy. However, the cost of living generally rises over time.
To ensure your family income benefit payments meet your dependant’s needs, not just now, but in the future, it may be a good idea to link it to indexation. Meaning your payment amount increases, as living costs rise.
Visit MoneyAdviceService – set up by the UK government, to provide free and impartial finance advice.
Can a family income benefit policy be written in trust?Yes. Any life insurance policy can be written in trust, and most providers offer trust forms free of charge.
At Reassured we provide customers with a free trust service to help with the application process. (Although, we do not offer advice).
Putting your policy in trust means that the pay out falls outside your estate, therefore avoiding probate. Trusts can also help you avoid the risk of having to pay 40% inheritance tax.
Family income benefit in summary:
- Pays out a regular, tax-free income
- Very affordable, low premiums
- Well suited for young families
- Can help with long-term family budgeting
- Optional critical illness element
- Policy can be joint
- Index-link option, (protect against rising living costs)
- Policy can be written in trust.
- Only pays an income if you die within the term, (unless you have critical illness)
- Only pays out for the remainder of the term, (amount beneficiaries receive depends on when you die)
- Not suitable for paying off a mortgage or other large debts
- You do not get your money back if you do not die during the term.
Why use Reassured to secure family income benefit cover?
- Life insurance is what we do, (it is all we do), day in and day out
- We will scan the market on your behalf, finding the most suitable and competitive quotes
- 18,500+ people cannot be wrong! We have an ‘Excellent‘ average Trustpilot rating of 9.6/10
- We are completely independent and impartial
- We never charge you a fee for our service
- There is no obligation to take out cover after we find you the best quotes
- We are a non-advised broker – we simply listen to your unique circumstances and find the most suitable policies.