Family income benefit is one of the lesser-known types of life insurance, yet can be of huge financial help for those left behind when a parent passes away. Read on to find out more...
How does family income benefit work?
When a spouse or partner dies, family income benefit helps replace lost income and relieve the financial burden for the surviving partner.
It works by providing a regular tax-free monthly benefit to cover some or all of the family's living expenses.
Who is family life insurance suitable for?
As the name implies, family income benefit can be particularly advantageous if you have a young family.
The monthly benefit payment can be spent however you want. It's typically used for mortgage payments, utility bills, food and other living expenses like childcare, school fees and so on.
The key difference between family income benefit and term life insurance is that the former makes monthly payments and the latter only makes a one-time lump sum payout.
How long does family income benefit pay out for?
Should the worst happen, family income benefit pays the tax-free monthly income from the point of claim until the policy ends.
For example, if the policyholder passed away six years into a twenty-five year policy, the family would receive the income benefit payment every month for the remaining 19 years.
The duration of the policy term is up to you. The longer the term the higher the premium.
The minimum term is typically five years and the maximum term tends to be in the 50-70 years range or up to a maximum age of 80-90 years.
Knowing there's a regular income for your loved ones to fall back on can bring enormous peace of mind. Especially if you have young children and those you leave behind might struggle financially without your income.
How much family income benefit do I need?
Just like with term life insurance, the level of family income benefit coverage you take out depends entirely on your family's circumstances and budget.
You chose the monthly benefit amount when setting up the policy so it's important to think through the financial implications of an unexpected death for you and your family.
Asking yourself the following questions can be helpful in working out how much cover you need:
- How would my family cope financially if I died?
- What savings and investments would I leave behind in my estate?
- Is my business able to continue trading without me? If yes, will my partner or spouse receive any dividends?
- Could my spouse or partner pay the mortgage/rent and living expenses by themselves?
- Would they have to give up their work or reduce their working hours to look after children?
- Would my spouse need to go back to work and pay for childcare?
- Would my child's schooling be affected?
- Would my family need to sell their home and downsize?
- Would current living standards and lifestyle be maintained?
- How much annual income would they need to replace my self-employed income?
The answers to those questions should give you a good idea of the benefit level required to provide a financial safety net for your family.
Directly matching your current net (post-tax) self-employed income is another option, though it may not necessarily correlate to the living costs your spouse or partner will have if you pass away.
For example, if your partner unexpectedly became a single parent, they might need to pay for childcare in order to return to work .
Why use family income benefit instead of family life insurance?
Family income benefit and term family life insurance aren't mutually exclusive.
The former is intended to cover the general living costs and day-to-day bills for your family each month. This may or may not include your mortgage or rent payment.
Many families find it worthwhile to take out both types of policy. The premiums can be very cost effective and an affordable way to get comprehensive cover.
For example, you could take out a decreasing term family life insurance policy to ensure the mortgage is paid off with a tax-free lump sum, and a family income benefit plan to provide a regular income.
The latter could be used for the utility bills, council tax, food, and lifestyle expenses for a specific number of years. For example, until your children turn eighteen or twenty-one.
If you're separated or divorced, family income benefit cover can also be used to continue making child maintenance or spousal support payments.
Regardless of how it's used, the monthly benefit payment ensures your loved ones aren't left with financial worries as well as the grief of their bereavement.
Are family income benefit payments index-linked?
Index-linking your family income benefit amount is optional. As the policy may not pay out for many years into the term, an index-linked plan can protect the benefit amount from the effects of inflation.
As we've seen recently, high inflation erodes purchasing power, so it's worth considering.
An index-linked policy is optional and has higher premiums than non-indexed policies. Some insurers allow you to set a specific indexation rate of 3 or 5 percent per annum, or use the RPI figure.