Family income benefit: a short guide
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Would you prefer that your family receive a lump sum or a regular income from a life insurance policy? The latter is known as family income benefit (FIB) and it can offer an alternative way to protect your family’s finances in the event of premature death. Below, our Grantham financial advisers explain how this special type of life insurance works, how it compares to a lump sum policy and ideas to integrate it into a wider financial plan. We hope you find this content helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
What is family income benefit in the UK?
In the UK, family income benefit is a specialised type of life insurance which offers a regular income to your loved ones if you die (or if you are diagnosed with a terminal illness) within its policy terms. It does not pay out a lump sum, unlike more “traditional” life insurance policies. Similar to these, however, you pay a monthly/annual premium to your policy provider to access the cover. If your loved ones do eventually start accessing the income, then they can do so free from tax. This can be a valuable way for them to replace your lost earnings.
How does family income benefit work?
Family income benefit does not offer a guaranteed income payout. Only if you die within the length of the policy does this happen. The policy length can vary depending on your needs. For instance, suppose you take out a policy lasting for 20 years. If you died 5 years into the policy, then it would pay out the income for the remaining 15 years. Alternatively, if you died 18 years into the policy then your loved ones would only get 2 years of income.
Things to consider with family income benefit
Naturally, you should think about how long you want a family income benefit policy to last before taking one out. One idea is to cover your children until the youngest turns 18 years old; at which point, they are legally responsible for themselves. You should also consider how much income may be needed by your family. Here, it can help to distinguish between essential costs and the “discretionary” ones (e.g. holidays). A policy should cover the former at a minimum. You should also consider how the value of the income will change over time due to inflation. For instance, £20,000 per year might sound reasonable in 2022. Yet what would it be worth 10 years from now? One way to address this issue is to consider an inflation-linked policy, where the income rises rise in line with a recognised index (e.g. the CPI) to preserve its value over time.
How much does family income benefit cost?
Family income benefit might cost as little as £10 per month, depending on your needs and circumstances. The premiums will likely be higher, for instance, if you opt for an inflation-linked policy rather than a level-term policy. Naturally, the more income you want from a policy the costlier it is likely to be. Other factors that can affect the cost include your age, your lifestyle (e.g. smoking) and medical history.
How does family income benefit compare to traditional life insurance?
Traditional life insurance offers a lump sum payout if you die within the policy terms. Family income benefit offers a regular income instead of a lump sum. To some degree, your choice between the two will depend partly on personal preference. Some families would rather have regular payments because they are used to having a monthly income. Others might like the security of having a large pot of money saved from a lump sum payout.
One advantage of family income benefit is that your loved ones are more likely to be disciplined with the money they receive. A lump sum, by contrast, can run dry surprisingly fast, especially since it is difficult for family members to keep track of withdrawals during a time of grieving. Yet family income benefit does suffer more from “diminishing returns” compared to traditional life insurance. Suppose you take out a 20-year life insurance policy. If you die at year 18, then your family still receive the full lump sum. By contrast, a family income benefit policy would only offer 2 years of payments. The total value of these payments might fall below the total value of the premiums you have paid throughout the policy.
Family income benefit is generally considered more affordable than traditional life insurance, partly because of the diminishing returns mentioned above. Yet bear in mind that it cannot be used to pay off your outstanding mortgage (as a life insurance policy could do by offering a lump sum). Consider speaking with a financial adviser to ensure that your insurance choice best lines up with your financial needs and goals.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
