Life insurance helps to prevent financial hardship for those we leave behind after death. The financial hardship that a family feels after losing someone immediately is the lack of a regular income. Our incomes will stop if we die but the bills will carry on regardless and there might even be new bills that pop up for things like childcare. What's usually needed in these circumstances is a regular income that will keep your household running as it was. A Family Income Benefit policy is the solution that fits this problem.
If you'd like to read more about life insurance in general and what you should consider when buying it, visit our article, Best & Cheapest Life Insurance in the UK. Alternatively, if you just want to find the best way to buy a family income benefit policy then you can jump ahead to see how to get the best rates and get up to £100 cashback.
What is a Family Income Benefit policy?
Family income benefit is a type of life insurance policy. The policy pays out in the event of death or terminal illness but instead of providing a lump sum of money, it provides a tax-free income. The main benefit of the policy is that the recipient of your life insurance can manage the money more easily for their day-to-day needs.
You choose an annual or monthly sum of money to insure and choose the period of time that you want the insurance to cover. Usually, this will be the period of time up to retirement or when your children have become financially independent. If death occurs during the policy term, for example, while you're still working or while your children are young, the income from the policy will start paying out to your family. It will continue until your policy ends, ensuring that your family doesn't suffer the financial loss of your regular income.
Sometimes, this type of policy is used to continue a specific regular payment which would continue after your death, for example, school fees or loan repayment.
Who should consider buying a Family Income Benefit policy?
If there is a regular expense that you want to continue to be funded for a set amount of time if you die, a family income benefit policy is probably the best solution for you. It is the most cost-effective way to arrange a life insurance policy that provides an income after you die.
A family income benefit policy is often the solution when it comes to questions such as; 'Who will pay to bring up my children if I die before they grow up?' and 'How will my family afford the bills or school fees if I die before I retire?'
Family Income Benefit is particularly useful for the following costs:
- Rent/Mortgage/Debt Payments
- Household Bills
- School/University Fees
- Childcare Costs
- Child Maintenance Payments
All of the above financial commitments can be catered for from the income paid out via a family income benefit policy (in the event of premature death).
What is the difference between a Family Income Benefit policy and a Level Term Insurance Policy?
A family income benefit policy is designed to provide a regular income if you die. A level term insurance policy will provide a lump sum of money if you die.
A level term assurance policy will provide the same amount of money to your family whether you die on the first day of the policy or the last day. In contrast, the total amount payable under a family income benefit policy reduces as time passes.
So, if you die on the first day after starting a family income benefit policy, your family will receive the annual income for all the years left on the policy, however, if you die a few years into the policy then it will only pay the income for the remaining years of the policy. This means that the longer you survive, the less your family will receive.
People often feel that a family income benefit policy isn't as attractive as a level term assurance policy because the payout reduces as time goes on. However, giving your family an income each month is easier to calculate and easier to manage than a lump sum. Remember, the longer you live, the less your family will actually need. Family income benefit policies are considerably cheaper than a level term assurance policy for an equivalent initial payout.
Can I add Critical Illness Insurance?
Critical illness insurance can easily be added to a family income benefit policy. The income from the policy will start paying out if a serious illness is diagnosed within the policy term. The policy will list the illnesses that are covered. In most cases, the policy combines the critical illness and death benefit so that it pays out on whichever event happens first.
Diagnosis of a serious illness such as cancer, heart attack or a stroke can be devastating and the financial impact can be even worse than death in some cases. It is therefore worth considering the following:
- Will there be a loss of income if you can't work
- Will there be a loss of a partner's income if they have to care for you
- Will you have to replace childcare duties that you usually fulfil
- Will you have to adapt your lifestyle to accommodate the effects of a serious illness
Receiving a regular income to pay your living costs while you focus on recovery can make all the difference.
Research by Macmillan reveals the sheer scale of the financial burden faced by people living with cancer - "Four in five (83%) people are, on average, £570 a month worse off as a result of a cancer diagnosis. Income goes down and expenditure rises at a time when money worries should be the last thing on people’s minds."
How much does Family Income Benefit Cost?
Life insurance costs are worked out using your age and smoker status in the first instance. The application will then ask you about your health, occupation and pastimes. The details that you provide could change the cost of your insurance however in the examples below we've based it on an individual who has no adverse health or pastimes and works in an office-based position. The prices quoted are payable per month.
Cost of family income benefit insurance for a non-smoker
|Family Income Benefit Insurance Cost|
|Non-Smoker||£1,500 monthly income for up to 20 years||£2,500 monthly income for up to 20 years|
|30 years old||£7.78||£10.97|
|35 years old||£9.96||£14.86|
|40 years old||£12.98||£19.96|
|45 years old||£19.39||£30.71|
Cost of family income benefit insurance for a smoker
|Family Income Benefit Insurance Cost|
|Smoker||£1,500 monthly income for up to 20 years||£2,500 monthly income for up to 20 years|
|30 years old||£11.17||£16.95|
|35 years old||£16.10||£25.16|
|40 years old||£25.58||£40.96|
|45 years old||£43.74||£71.23|
Which insurance company has the best Family Income Benefit policy?
You may be wondering how and why one insurance company's policy would be better than another's. After all, it pays out an income if you die and continues to do this until the end of the policy term. Surely, all insurance company's policies do this. Well, that is true but life insurance policies include many other benefits that you may not consider at first but can be extremely valuable to you. I have listed these below with a brief explanation of how they work.
Most customers want to achieve a balance between cost and quality. Whilst a policy that provides all the extras might be desirable, do weigh this up with the cost. In fact, you don't always have to pay more to get a better quality insurance policy.
In order to ensure that you buy the best possible life insurance policy for your particular needs, you should speak to a specialist life insurance adviser*. Not all of the options below will be necessary and in fact, you may have other insurances that have some of these benefits already included. A specialist adviser will show you the best prices and talk you through the differences in the quality of the products to recommend the best insurance company for you.
|Life Insurance Benefit||Description|
|Waiver of premium||This option will pay your monthly life insurance premiums for you if you become incapacitated and cannot work for a period of time. It often comes at an additional cost.|
|Option to convert income to lump sum||Most insurers will provide you with an option that allows your beneficiaries to convert all or part of the income they would receive into a lump sum of money when it is time to claim.|
|Access to Mental Health Support||Provides access to online, telephone and sometimes even face to face counselling and mental health support. Some insurers will extend the access to your immediate family too.|
|Terminal Illness Benefit||Pays the death benefit early if the insured person is diagnosed as terminally ill. Most insurers require a consultant to confirm that the insured person has 12 months or less left to live.|
|GP Access||Provides telephone, face to face and/or video access to a GP. Often the service will allow the GP to prescribe treatment or a referral to an alternative doctor.|
|Access to Second Medical Opinion||Allows the insured person (and sometimes family members) to ask leading doctors for a second medical opinion in the event of a diagnosis. This can be invaluable when it comes to selecting the best course of treatment.|
|Free Cover||Some insurers will provide you with cover whilst they process your application.|
|Separation option||Allows 2 people who have taken joint insurance to separate their insurances if needed.|
|Option to increase cover||Some insurers will allow you to increase the value of your insurance by a limited sum without going through a full application again.|
Can I put a Family Income Benefit Policy in trust?
A trust is a legal agreement that allows you to nominate those who will benefit from the money paid out from your life insurance. You will also nominate the people who you wish to manage the monies as trustees. A family income benefit policy can be put in trust and probably should be.
The advantages of putting your life insurance in trust are:
- Quick Access - The payout isn't delayed by probate because the money passes from the insurance company into a trust.
- The Right People - Only your nominated trustees will be able to access the money for your chosen beneficiaries. The trustees and beneficiaries can be the same people as long as they are over the age of 18. You can divide the payout between different people.
- Tax-Free - The payout avoids being assessed for inheritance tax as it doesn't add to your total estate.
Regardless of how complex or simple your family structure is, ensuring the right amount of money ends up with the right people quickly should be high on your list of priorities. The emotional impact of a family member's death is immediate but the financial impact won't be far behind. A correctly completed trust will ensure your family don't struggle to pay bills and funeral costs while they wait for probate to be processed which can take months and in some cases, even years.
How to find the best and cheapest Family Income Benefit policy
Sourcing the right policy at the right price is a difficult thing to do and so often the best solution is to speak to an independent life insurance specialist*. Specialist life insurance advisers will take the time to understand what you want to achieve with your life insurance and guide you to the best solutions available in the market.
There are many companies that provide this sort of advice, however, we have vetted one that provides outstanding service with advisers that are knowledgeable, caring and best of all, have access to the best rates that you can find. They are trained to get important legal aspects such as the trust organised in a way that will ensure any payout ends up with the right people quickly. Finally, if by any chance, you haven't selected the best solution and another is better suited to you, they will point this out. It's a free service and is regulated by the Financial Conduct Authority to give you peace of mind that you're taking appropriate advice.
To arrange a callback at a time that suits you, simply complete this form* and someone will be in touch. As a Money to the Masses reader, you'll also receive up to £100 cashback when you arrange your life insurance.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. This link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article.
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