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 18th 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:
Read our guide to life insurance to explore these factors in more detail.
Established in 1998, LifeSearch is the largest independent and most awarded life insurance advice broker in the UK. You can use its services to get no obligation quotes for life insurance, critical illness insurance, income protection and other protection products. By accessing some of the biggest life insurance companies in the UK, such as Aviva, Legal & General and Vitality, you can be confident that you’re getting the best protection on the market.
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.
Since 1998, our preferred insurance broker LifeSearch has helped over 750,000 UK families and businesses find the protection they need.
This includes one family, a married couple and two children aged six and nine, who were reliant on one person’s yearly income of £62,000. One of the family’s primary concerns was that they wouldn’t be able to live in their home if something were to happen to their breadwinner. LifeSearch mitigated this worry by advising a mortgage protection insurance policy which cleared the mortgage balance if the earner were to pass away within the policy’s 30-year term.
On top of this policy, it advised Family Income Benefit plan which would pay out if the earner were to die too. The family would enjoy a tax-free monthly sum to help with bills with the cover extending until their youngest child reached 18.
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.
Many insurance providers will offer critical illness cover as part of your family income benefit plan. This will come at an extra cost, however. More information on critical illness cover can be found in our guide.
Yes, it’s possible to take out a joint family income benefit policy. If this of interest, then you should consider when you wish the policy to pay out. It can either pay out on the first person’s death, or the second person’s death when the policyholder’s beneficiaries will then use the money.
While this can be cheaper than two separate policies, a joint life insurance policy will only pay out once.
As with other life insurance policies, your family income benefits policy can be written into a trust. One of the main benefits of doing this is that you can decide who to appoint as a beneficiary or trustee. This means they have control over the life insurance payout and, because it falls outside of your estate, it doesn’t necessarily need to go towards paying off your outstanding debts, and won’t be subject to Inheritance Tax.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.