Family Income Benefit For The Self-Employed

Find out how family income benefit insurance works and why it could be one of the best decisions you make for your loved ones.

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Graham Cox
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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.

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How much does family income benefit cost?

Premiums for family income benefit depends on multiple factors that the life insurance company will consider including:

  • the benefit level you require
  • whether the cover is inflation-linked (see below).
  • occupation
  • age
  • weight/BMI
  • health, including any pre-existing medical conditions
  • smoking and alcohol consumption
  • whether you participate in dangerous sports or activities like paragliding, private flying etc.
  • how much commuting you do
  • your level of international travel and countries you visit

Are family income benefit premiums guaranteed?

Guaranteed premiums are widely available for family income benefit policies, so the amount you pay will never increase during the term.

The only exception is if you amend the term of the policy or the benefit amount.

Index-linked policies are not guaranteed, as your premium will be adjusted upwards each year by a similar amount.

Some life insurance companies also provide quotes with reviewable premiums. At the start, these are often cost less than guaranteed premiums but usually increase every five years when the premium is reviewed and can end up more expensive in the long run.

As guaranteed premiums offer certainty and peace of mind, they tend to be more popular.

Can family income benefit be paid as a lump sum?

Yes, your insurer may provide the option to convert the regular monthly income at or after the point of claim, so that your family receives a reduced one-time lump sum instead.

However, the one-time lump sum payment you receive will be for a lower amount than the total value of all the monthly payments due for the remainder of the policy term.

If you are in any doubt, seek independent financial advice before using this option.

How do I apply?

Making an application is easy and can be done on the phone with your mortgage broker at SEMH.

During the call, which takes about 30 minutes, the adviser will gather all the information required for the insurance company to assess if they can offer cover.

At the end of the call, the insurer's decision will either be:

  • Accepted on standard terms, which means the policy has been approved by the life insurance company at the quote provided
  • Rated which means that based on the answers provided, the person is rated as a higher risk and will only be insured on a more expensive premium than the original quote.
  • Further assessment is required before a decision can be made. With your permission, the insurer will access GP and/or other health professional reports to investigate your medical history including any pre-existing medical conditions.
  • Declined. If the insurer's underwriting team assess the risk of insuring the applicant to be too high due to a rare medical condition or complex health history.

Should family income benefit be written in trust?

Just like term insurance, a family income benefit policy can be placed in trust to facilitate a faster payout to the person legally entitled to it. It can also help mitigate against inheritance tax.

You should seek professional advice if you're unsure whether placing the policy in trust is right for your circumstances.

Is family income benefit cheaper than level term insurance?

Often, yes. Unlike level-term insurance, family income benefit isn't paid out all in one go so can work out slightly cheaper.

In addition, level term life cover pays out the same tax-free lump sum regardless of when the policyholder passes away during the policy term. Whereas the total cost to the insurer of a FIB policy depends on when you pass away.

Is family income benefit taxable?

No, the regular monthly income from family income benefit is tax-free, so your partner or spouse will receive 100% of the benefit amount.

Does family income benefit cover critical illness?

No, but for an additional premium you can add critical illness cover (CIC) to your family income benefit policy.

A CIC policy pays out a single tax-free lump sum if you suffer a serious illness. The three most common illness claims are for cancer, heart attack, and stroke, but other major illnesses are covered by insurers as well.

Our guide to critical illness cover for the self-employed has more details.

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What is the difference between family income benefit and income protection?

If you're self-employed, it can be highly desirable to take out both family income benefit and income protection cover as the two policies complement one another.

How the two policies pay out

Whilst they both pay out a tax-free monthly income, FIB only does so to the surviving parent (or a guardianif you're a single parent) when the policyholder passes away.

Income protection however, pays out if you're unable to work in your chosen occupation due to a very broad range of illness or injury. Including mental health issues like depression and anxiety and musculoskeletal problems such as chronic back pain.

Unlike FIB, which pays out for the remainder of the policy term, income protection stops paying you a monthly income if and when you return to work or reach retirement.

However, if you are severely incapacitated by an illness or injury and are unable to return to your own occupation, income protection can pay out for years until the policy ends.

Can I get a joint family income benefit policy?

Yes, just like you can with a decreasing or level-term life insurance policy, it's possible to take out a joint family income benefit policy which pays out to the surviving parent on first death.

Another option is for both parents to take out individual policies. This is a more expensive option than taking out a policy on a joint basis, but if both parents pass away, two lots of monthly payments would be made.

How can I buy a family income benefit plan?

To buy a plan, get in touch with SEMH today by calling 0117 205 0655 or by scheduling a free consultation here.

As an independent specialist mortgage and protection broker SEMH will source the most suitable FIB quotes from a wide panel of household name insurers and niche providers.

We'll can explain all the various protection options, answer any questions you have and provide impartial advice. And we'll be more than happy to provide a quote that meets your needs, preferences, and budget.