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 in the event of the policyholder’s death or diagnosis of a terminal illness.
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 pay out is provided if a claim has not been made by the time the policy expires.
Family income benefit plans can often be well suited to parents with young children, who want an affordable way to ensure that their dependents are adequately provisioned for.
This type of life cover is generally very cost effective because the risk to the insurer reduces each year and they’re not guaranteed to pay out, (unlike a whole of life policy).
Another advantage of family income benefit is it doesn’t require beneficiaries to budget, manage, invest a large lump sum. This can involve complicated investment decisions, that incur fees or taxes, at a time when you’re grieving.
How does a family income benefit plan work?
Before you buy family income benefit, you need to establish how much income you require for your dependents 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, traditional life cover generally pays out the maximum amount, regardless of whether the policyholder dies 1 week or 25 years into the term.
As the potential risk to your life insurance provider decreases with each passing year, the cost of these 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 factors, including age, the annual income you want to pay out, the term length and your health/lifestyle.
An example scenario:
Henry and Natalie have 2 young children and live off Natalie’s £30,000 a year salary. Living off of a single salary and having a young family, they feel vulnerable and want to protect their children’s future.
Natalie decides to take out family income benefit, as she feels it provides the most amount of cover, at the most affordable price. The couple decides they would require an income of £1,500 per month, over the next 21 years, in order to meet their future living costs.
How would this work?
- If Natalie were to die immediately after she purchased cover, Henry and the children would receive £1,500 every month for the remaining 21 years of the policy
- If Natalie were to die 10 years into their policy, Henry and the children would receive £1,500 every month over 11 years
- However, if Natalie doesn’t die during the 21 years of the policy term, the family would not receive any form of pay-out.
Family income benefit vs standard life insurance
As detailed above, standard life insurance policies pay a lump sum when the policyholder dies, whereas family income benefit provides a regular tax-free income. However, it doesn’t necessarily have to be a case of having one, or the other.
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 your mortgage), alongside a FIB policy, which provides your dependents with a steady income stream for day to day living costs.
Both options provide protection and security for your loved ones, and it’s a case of weighing up the type of the cover you need and what you can afford.
Family income benefit vs income protection
Although family income benefit and income protection sound very similar, they’re 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’re alive, but unable to work due to an illness or accident.
Family income benefit with critical illness
Most 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.
The rising cost of living
You’ll 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, as we know 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 the cost of living increases.
Visit MoneyAdviceService – set up by the UK government, to provide free and impartial finance advice.
Can a family income benefit policy be put in trust?
Yes. Any life insurance policy can be written into trust, and most providers offer trust forms free of charge.
Putting your policy in trust means that payments are made outside of your estate and can often be settled more quickly as a result. Trust 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, premiums are low
- Well suited for young families
- Optional critical illness element
- Policy can be joint
- Index-link option, (to protect against rising living costs)
- Can be written in trust.
- Only pays an income if the policyholder dies within the term, (unless you have critical illness element)
- Only pays out for the remainder of the term, (amount your beneficiaries receive depends on when you die)
- The policyholder doesn’t get their money back if they don’t die during the term.
Why use Reassured to secure the best family income benefit cover?
- Life insurance is what we do, (it’s all we do), day in and day out
- We’ll scan the market on your behalf, finding the most suitable and competitive quotes
- 11,500+ people can’t be wrong! We have an average Trustpilot rating of 9.6/10
- We’re completely independent and impartial
- We never charge you a fee
- There’s no obligation
- We’re a non-advised broker – we listen to your unique circumstances and find the most suitable policies.
Talk to our Reassured consultants today on 0808 168 2025 about family income benefit cover and how it could help protect your family. Alternatively Start Your Quote online today – it only takes 2 minutes.