Family income benefits explained

Whether it’s to increase your chances of getting a mortgage or to provide a financial safety net for your loved ones, you’ll need to consider various aspects of your life insurance policy. One important decision you’ll need to make is if a lump sum payout or family income benefit plan is best for you.

Below we’ve explained what a family income benefit plan is and how you can customise your policy to suit your needs.

A family income benefit plan is a type of life insurance policy. Under this policy your cover will extend over a set time, for example 20 years. If you die during this period, then your insurer will pay a tax-free monthly income until your policy comes to an end.

This means your eventual payout is unpredictable. If your policy spanned over 20 years and you died during the second year, your insurer would need to pay out a regular income to your beneficiaries over the next 18 years. Alternatively, if you died in the 18^th year of the term then your insurer would only pay the agreed income for the remaining two years of the policy.

This is the main difference between a family income benefit plan and a standard life insurance payout. If you wish to receive a guaranteed lump sum, then you’ll know how much your beneficiaries will receive in the event of your death.

Since your potential payout constantly falls, family income benefit plans tend to have cheaper premiums than other forms of cover. In addition, some people find it easier to manage a set regular income than a large one-off lump sum.

Of course, the greatest disadvantage of a family income benefit plan is that you risk receiving substantially less than what your payout could be under a standard life insurance policy. If you die towards the end of your term and have an outstanding mortgage or large debt, your family could be left unable to service these bills.

Like with other types of term life insurance plans, your premiums and level of cover will be determined by a variety of factors. These could include:

• Your age
• Health
• Lifestyle
• Your length of cover
• Your desired level of cover

Read our guide to life insurance to explore these factors in more detail.

If you’re looking at a family income benefit plan over a long-term it’s worth remembering the effects of inflation.

Inflation is used to describe the rate at which prices of goods and services rise over time, which is normally one year. More information on inflation can be found in our guide, but essentially constant inflation means £1 today will be worth less in the future.   

This should be a concern for your life insurance cover because it means the income through your family income benefit may be insufficient in the long-term.

That’s why some life insurers offer family income benefit policies which increase in line with inflation. Normally these deals do charge higher premiums, so you’ll need to consider if this add-on is necessary.

If you’re looking for an insurance policy which covers your regular income when you fall ill, then have you considered income protection instead?

Income protection is a form of insurance that covers your earnings if you’re unable to work because of illness or injury. Your earnings are then covered until you either return to work, retire or die, whatever is the soonest.

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.