While most life insurance policies pay out a lump sum when you die, Family Income Benefit Insurance is a special type of life insurance policy that pays out a regular income to your family members for a set period of time when you pass away.
Much like income protection insurance, when you take out a policy you stipulate the level of cover required each month, taking into account all your household expenses that will need to be covered, including your mortgage/rent, bills and food costs. This will ensure that your family members remain financially stable once your income is no longer available.
In contrast to a general whole of life insurance policy, which would guarantee to pay out the full lump sum amount insured, regardless of when you claim on the policy, with Family Income Benefit Insurance, the longer you live throughout the policy, the less is paid out.
For example, if you took out a policy over 30 years that pays out £3,000 a month, if you were to die in the first year of the policy, the insurer would pay out £3,000 a month for the full term. If, however, you were to pass away 20 years into the policy term, the insurer would only pay out for the remaining 10 years. If you die after the policy term has finished, there is no pay out.
Family Income Benefit Insurance is one of the more affordable forms of life insurance, as the insurer does not have to pay out a large lump sum in one go and the total amount payable reduces as the policy matures.
You can choose from guaranteed premiums and reviewable premiums. Guaranteed premiums usually start out costing more than reviewable premiums, however you will always know exactly what your payments will be for the duration of the policy. With reviewable premiums, the insurer will review them on a regular basis and may increase them, running the risk of the premiums becoming unaffordable further down the line.
You can also opt to increase the value of your Family Income Benefit Insurance in line with inflation to protect your family from the rising costs of living. This will likely increase the cost of your policy premiums from the outset.
As with other forms of insurance, the cost is also dependent on your individual circumstances, such as your health, lifestyle, age and what size monthly payment you want the policy to pay out.
Family Income Benefit Insurance may appeal to those who prefer to receive a simple, regular income rather than having to budget a single lump sum payment over the years to come. Managing a single lump sum can be challenging at the best of times, particularly when a family is grieving the loss of a loved one.
Many people choose to take a policy that ends when larger financial commitments are no longer payable. This may be when your mortgage is paid off, when you plan to retire or when children are expected to be financially independent.
This type of policy, however, may not be suitable if you have an outstanding mortgage which you would like to be paid off in full when you die. While the monthly payments from Family Income Benefit Insurance may cover the monthly mortgage payments, it will likely take many years to pay off the home loan entirely and means the surviving spouse will not own the home outright and may have to try and re-mortgage the property on their own at a later date.
As mentioned above, the amount paid out reduces over the course of the policy, so if you want the comfort of knowing your family will receive a guaranteed amount, no matter when you die, a term life insurance or whole of life policy may be more appropriate.
Policies are available on both an individual and joint basis. While a joint policy may cost less than two individual policies, only one set of income payments would be paid after the first policyholder dies. If each spouse were to have individual policies, two sets of payments would be paid out should both policyholders die during the term of their policies.
You can also write your policy into trust, which means that it will be viewed outside of your estate when you die, and family members should receive the payments quicker by avoiding the probate process.
If you would like to talk to an adviser about your insurance policies, please contact Finura.
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