Family income benefit life insurance explained

At a glance

• Family income benefit is a form of life insurance that pays your beneficiaries a monthly income for a pre-agreed length of time.
• It’s cheaper than lump sum policies, but also means the potential payout constantly falls.
• Monthly payouts are free from income tax.

When considering life insurance there are plenty of options to consider, but one key decision to make is whether a lump sum payout or family income benefit plan is best for you. The former offers a one-time payout that can be spent as needed, while the latter pays your loved ones an income for a set time period. Not sure which one to choose? This guide takes a closer look at what a family income benefit plan is and whether it’s right for you.

What is family income benefit?

A family income benefit plan is a type of life insurance policy that offers cover for a set time period (for example 20 years). If you were to die during this period, your insurer will pay a tax-free monthly income to your beneficiaries until the policy comes to an end.

This means you can be confident that, should the worst happen, your family’s essential bills will still be paid – but it also means that the eventual payout is unpredictable.

For example, if your policy spanned 20 years and you died during the second year, your insurer would need to pay out a regular income to your beneficiaries for the next 18 years. Alternatively, if you died in the 18th year of the policy, then your insurer would only pay the agreed income for the remaining two years of the term.

This makes it very different to a standard life insurance payout, which pays a lump sum so you’ll know exactly how much your beneficiaries will receive in the event of your death (though it could change if you take out an inflation-linked or decreasing term plan).

How does family income benefit work?

Family income benefit works by paying your beneficiaries a monthly income after you’ve gone. It’s designed to provide regular financial support rather than a one-off payment, and crucially, all payments are tax-free.

Much like with any other kind of insurance policy, you’ll pay set premiums (which can be monthly or annually) based on your chosen amount of cover and the length of the term. If you die during the term, your family will receive the income for the remainder of the policy, but if you outlive the policy you’re no longer covered and you won’t get any payments or premiums returned to you.

Note that there are generally two kinds of cover to choose from – “level cover”, which pays out a set monthly amount that’s fixed at the outset, and “inflation-linked cover”, where the monthly payout will rise in line with inflation.

The former option will be cheaper, but it also means that any future payouts could be insufficient and may no longer cover the essentials, particularly if inflation has risen sharply. This is why, if you’re looking at a family income benefit plan over a longer term, it’s worth remembering the effects of inflation and considering if an inflation-linked policy could be preferable.

Should I get a family income benefit policy?

Family income benefit policies are designed for those who want to ensure their loved ones can cover their essential outgoings (such as rent/mortgage payments, utility bills or childcare costs) should you die, almost acting as a replacement for your lost earnings. For this reason it’s well-suited to families with young children, particularly if there’s only one breadwinner, as this kind of policy can ensure your family will be able to keep up with the bills after you’ve gone.

But it can also be suitable for couples who share bills, as if you were to die your partner may find it difficult to remain in the shared home with only their income. Those who care for a disabled or elderly relative may also want to consider it, as the monthly income could be used to cover alternative care costs after you’re gone.

Essentially, family income benefit could be useful for anyone with dependents who would find it difficult to cover the bills without your income. However, make sure to remember the limitations – if you’re looking for a policy to completely pay off the mortgage or other debts, opting for a term or whole of life insurance policy would be better in order to receive that lump sum.

How much does family income benefit insurance cost?

Like with other types of life insurance, your premiums will be determined by a variety of factors. These include:

• Your age, health and lifestyle
• The amount of cover you need (make sure to calculate how much your family would need to cover the bills if you were gone)
• The length of the policy (shorter terms will be cheaper, but also limit the potential for future payouts)
• Level or inflation-linked cover (level cover is cheaper but may prove insufficient in the long-term)

Typically speaking, the younger and healthier you are, the lower your premiums will be. Similarly, if you only need a small amount of cover, or you opt for a shorter term, you won’t have to pay so much in the form of premiums. But it will always vary depending on the insurer and the details of your cover.

Alternative life insurance policies

There are other forms of life insurance you may want to consider instead of, or even as well as, family income benefit. For example, many insurance providers will offer critical illness cover as part of your family income benefit plan – albeit at an extra cost – which could provide an additional level of cover in case you were diagnosed with a critical illness. More information on this can be found on our critical illness insurance page.

You could also consider things like mortgage protection, income protection or a standard life insurance policy that pays out a lump sum rather than a monthly income.

Family income benefit vs. income protection insurance

If you’re looking for an insurance policy that covers your regular income when you fall ill, income protection could be worth considering. This is a form of insurance that covers your earnings if you’re unable to work because of illness or injury, providing a monthly income until you return to work, retire or die, whichever comes first. Note that this form of insurance is to cover your earnings while you’re still alive, whereas family income benefit is to replace your income after you’ve gone.

Family income benefit vs. level term life insurance

Level term life insurance will pay out an agreed lump sum if you die within the policy term, regardless of when that is. So whether you pass away within the first year of the policy or the 20th, your beneficiaries will receive the same payout. This makes it very different to family income benefit, which not only pays a smaller amount on a monthly basis, but also results in a smaller total payout the further along you are into your policy.

You may also want to consider decreasing term life insurance as an alternative. This one also pays out a lump sum, but the value decreases over time, usually to coincide with a large debt repayment (typically a mortgage). This can be cheaper than level term life insurance, while still offering reassurance that your family’s most substantial debt will be paid off in the event of your death.

There’s a lot to think about, so it could be worth speaking to an insurance broker to discuss your options and find the type of policy that best suits your needs.

How to choose the right policy

Wondering how to choose the right insurance policy? There are a few key things you should consider, including:

• How long you want the policy to last for.
• How much cover you’ll need (make sure to consider possible future costs as well as current ones).
• Whether you want any add-ons (such as critical illness cover).

If you’re still unsure what policy is best for you, seek advice from a qualified, independent expert. Our preferred life insurance adviser is LifeSearch, and you can speak to one of its consultants by visiting its website.