In this brief guide, we are going to discuss family income benefit.
What is Family income benefit?
Family income benefit is a type of life insurance (It is a term life insurance.) which gives you regular income to your beneficiaries if you die during the family income benefit insurance term. You must continue making payments if not our cover will end as there is no “cash in value”.
The family income benefit should not be mistaken with income protection cover which pays out a percentile of your salary if you are unable to work due to an illness.
Benefits of the family income benefit insurance
Some of the benefits of a family income benefit insurance include:
- It pays out up to £5,000 a month (but maybe more with certain providers)
- Premiums are low and usually cheaper than life insurance policies with similar payouts
- Monthly payouts are tax-free
- You can get policy terms of up to 40 years
- Helps with family planning and budgeting
- It can be written in a trust
- You can have joint policies
- It can avoid inheritance tax
- You can add critical illness cover
- It has terminal illness cover as standard which means you can claim if you become terminally ill and have less than 12 months to live.
Disadvantages of the family income benefit
Some of the disadvantages of a family income benefit insurance include:
It will only pay ut for the remainder of your policy term from when you die
You will not get any money back if you do not die during the term
It is not suitable for paying off large debts such as a mortgage
It will only payout if you die during the policy term
How does family income benefit work?
The family income benefit pays out a regular income to your beneficiaries should you die during the term.
The income paid out to your beneficiaries will be paid from the point you die till the time the family income benefit term ends.
People usually choose to get a family income benefit term which matches a life goal they have.
This could be seeing their kids through college or having the family income benefit insurance until their last kid is 18.
This means if you die during the term you chose then your family member would be covered with the regular payment and can go on to achieve whatever you initially set out for them.
This type of cover provides peace of mind that any family plans can be achieved even if the main breadwinner passes away.
The family income benefit insurance can also be index-linked to inflation rates so the payouts will reflect any rise in inflation and hence provide value should inflation rise.
When does the family income benefit payout?
The family income benefit insurance will payout if you die within the term you got the life insurance policy for. The payments will then cease at the end of this term.
If you got the family income benefit for 15 years and died a year after then the family income benefit insurance will payout for 14 years as long as you were making your monthly premium payments each month.
If you had ceased making your monthly premium payments each month then you will not be eligible to receive any family income benefit payouts as the cover would have ceased.
Alternatives to family income benefit insurance?
You don’t have to get the family income benefit insurance.
There are other insurance products out there which will provide a lump sum cover for your beneficiaries if you died.
This may be much better than a regular income as they could use this to clear off large debts and cover any huge costs.
Some people take both a lump sum life insurance policy and a family income benefit policy so there beneficiaries end up with the best of both worlds.
A lump sum to pay off any huge debts and cover any costs and a regular monthly income to cover monthly expenses.
Your employer may also offer a “death in service” feature where they will pay your beneficiaries a multiple of your salary if you die.
You should consider this and consider if it will be enough for your family to live off before making a final decision on how much cover you need and where to get it from.
A lot of people may be inclined to choose the family income benefit insurance because the payouts may be similar to a life insurance when added together and the premiums tend to be cheaper.
Are you eligible for family income benefit insurance?
You may be eligible for family income benefit insurance but you will have to check with the policy provider as different policy providers have different eligibility requirements.
Typically, for most family income benefit policies you will need to:
- Be at least 18 years of age
- Be no more than 64 years of age
- Be a UK resident
- Be able to apply for the insurance on our own
There are no medical checks needed when considering applicants for the family income benefit insurance but you may need to answer general questions about your health and lifestyle choices.
If you are unsure of how to go about getting this policy you may want to get help from an insurance broker or insurance specialist.
How much will family income benefit insurance cost?
As with all insurance products the premium charged will differ based on your age your health and lifestyle choices, how much cover you need, how long you want the cover for and the risk scoring of the provider you choose.
If you are rather unhealthy and much older you can expect your premium to be much higher than someone who is younger and healthy.
Some policies will also have additional features such as critical illness cover which will cover you if you are seriously sick. This addition will, of course, push the premium up.
How long should you get it for?
The term you should choose on your family income benefit policy will be determined by the stage of life you are currently at and what major things you currently spend money on.
Are you spending on educating your kids? Spending on your mortgage? Or maybe you are currently spending on childcare costs.
Whatever it is you will need careful planning to know that the payouts from the policy will cover your beneficiaries if you should die within the policies term.
You should also be aware that this kind of policy is not suitable to cover monthly mortgage repayments as except your time it to end at the same time as your mortgage, most people will usually have tens of years to go o their mortgage by the time the policy term they set on their family income benefit policy runs out.
Can I get a joint family income benefit policy?
Yes, you can geta joint family income benefit policy but it will only pay out once and it will begin to payout on the death of the first policyholder( as long as they die during the policy term).
If you want two sets if payouts then it is better to get two separate policies although the combined cost may be higher than a joint family income benefit policy
Reviewable vs guaranteed premiums
When choosing your family income benefit policy you will usually be presented with a choice.
Reviewable premiums or guaranteed premiums.
Reviewable premiums will regularly be reviewed by the insurer and could go up in the future and become unaffordable although they may initially be the cheaper option.
Guaranteed premiums will stay the same for the term of the policy
Terminal illness cover is included as standard
Family income benefit policies also have terminal illness cover as standard.
This means if you become terminally ill and have less than 12 months to live they will provide you with your monthly tax-free payments if you make a claim
The payouts will continue the policy term ends and can be very helpful during such a difficult time.
FAQs: Family income benefit
Can family income benefit be put in trust?
Yes, you can put your family income benefit policy into a trust and this may be the most tax-efficient way to do it as HMRC will “gross-up” your family income benefits monthly payouts to equal a lump sum.
You should seek independent tax advice.
How is family income benefit treated for IHT?
As the payouts received from the family income benefit will form part of your estate it may have inheritance tax(IHT) applied to it.
Is family income benefit taxable?
The monthly payments received on family benefit are tax-free but inheritance tax may be applied initially.
In this brief guide, we are going to discuss family income benefit.
If you have any questions or comments please let us know.