It’s a sad statistic that 127 children are bereaved of a parent every day in the UK.
While it can't replace you, having the right protection in place means that your family won't have to make financial cutbacks to their daily routine.
Family income benefit isn't something that's available through Confused.com, but this article aims to answer some frequently asked questions on this type of insurance.
What is family income benefit?
Family income benefit (FIB) is an alternative to traditional life insurance, it pays out in monthly instalments rather than one lump sum.
For some, budgeting a large sum of money while going through a bereavement can add stress.
Family income benefit helps to avoid this stress by paying out monthly, like an income.
It means your family can continue with their daily living without having to make changes to their lifestyle or budget a lump sum.
Key points:
- Pays a regular income to your loved ones if you die during the policy term.
- Your loved ones will receive payments for the remainder of the term.
- Can help to cover monthly outgoings like rent or mortgage payments, household bills, childcare costs etc.
- Terminal illness cover is included as standard. You can make an early claim on your policy if you’re diagnosed with a terminal illness and given less than 12 months to live.
- Critical illness cover can be added for an additional cost to allow you to make an early claim in the event of serious illness.
How does family income benefit work?
Family income benefit works by covering you for an agreed period (known as the policy term) and paying out if you die during this time.
You’ll choose how much you’d like to be paid out on a monthly basis. You could choose to mirror your monthly salary to ensure there are minimal changes to your family’s usual budget.
Insurers use information such as your age, medical history, smoking status, occupation and lifestyle to work out your insurance price.
If you die during the policy term, your loved ones can make a claim. They will then receive monthly income payments for the rest of the policy term.
For example, if you have a policy term of 30 years and you die 5 years into the policy, payments would be made for the remaining 25 years. Or, if you die 20 years into the policy, payments would be made for the remaining 10.
If you don’t die during the policy term, your policy will expire and your loved ones won't get a pay out.
How much family income benefit do I need?
The Child Poverty Action Group estimated the average cost of raising a child until the age of 18 was £260,000 (increasing to £290,000 for a single parent). But how much family income benefit you need will depend on your family and your usual spending.
It’s likely that you’d want enough to help cover:
- A roof over your family’s heads (monthly rent/mortgage payments)
- The cost of running your home (household bills and home maintenance)
- Childcare (you may want to leave more than you would typically pay to help cover any additional childcare that’s needed)
- Family living (such as food shop, clothes, trips out)
- Education costs (school uniforms, school trips, stationary)
Using a life insurance calculator can help you decide what costs you’d like to protect and how much cover you’d need to do so.
How much is family income benefit?
The cost of family income benefit depends on your personal circumstances as insurers will take the following into consideration:
- Age
- Smoking status
- Medical history
- Family medical history
- Occupation
- Lifestyle (such as your hobbies and alcohol consumption)
Certain policy details can also impact the price you pay, such as:
- Policy term
- How much cover you need
What’s the difference between family income benefit and life insurance?
Simply put both offer life cover but they do so in different ways.
Traditional life insurance policies, such as level and decreasing term life insurance, pay out a lump sum pay out if you die during the policy term. Whereas family income benefit pays out in monthly instalments.
Most other policy details are similar, such as offering cover for an agreed amount of time, including terminal illness cover as standard and being able to add critical illness cover for an additional cost.
The one that’s best for you will depend on what you want to cover.
For example, if you wanted a policy that could help your loved ones pay off the mortgage in full, family income benefit wouldn’t be suitable for this large cost.
Can I buy joint family income benefit?
Yes, you can buy family income benefit as a joint policy.
A joint policy will work by covering 2 lives (most commonly parents or partners) under 1 policy, with 1 premium to pay.
Your life insurer should pay out if 1policyholder dies during the policy term. once a pay out has been made, the policy expires.
Is family income benefit taxable?
No, family income benefit payments are tax free. They aren’t subject to income tax.
However, if the payments form part of your estate when you die they could be subject to inheritance tax.
Inheritance tax is charged at 40% if your estate exceeds the threshold of £325,000.
Can family income benefit be written in trust?
Yes, you can write a family income benefit policy in trust.
When a policy isn’t written in trust, the pay out will form part of your estate when you die.
If an estate is valued at over £325,000 your loved ones will be liable to pay inheritance tax, which is charged at 40%.
Writing your policy in trust helps to detach the pay out from your estate when you die, meaning your loved ones won’t have to pay inheritance tax on the pay out.
What are the advantages and disadvantages of family income
| Advantages | Disadvantages |
|---|---|
|
It’s usually an affordable option and you can choose a monthly payment amount to suit your family
|
Can’t cover larger costs like paying off the mortgage in full or funeral costs
|
|
Pay out is not subject to income tax
|
Payments only last until the end of the term (so if you died with one 1 year left until the end of the term, your loved ones would only receive payments for 1 year) |
|
Can offer some reassurance that your family has financial support when you die
|
It’s possible to outlive the policy term
|
What are the alternatives to a family income benefit policy?
If family income benefit doesn’t sound right for your needs, here are some alternatives you could consider:
Level term life insurance
Covers you for an agreed period (the term) and pays out a fixed lump sum if you die during this time.
If you’d benefit from a large lump sum to help cover an interest only mortgage, funeral costs or other debts, level term life insurance could help you to do this.
Decreasing term life insurance
This cover you for an agreed period (the term) and will pay out a lump sum if you die during this time.
The pay out amount reduces throughout the policy term.
It could be an ideal option if you’re looking for a policy specifically to help pay off your mortgage in full when you die.
You can choose for your policy term to mirror your mortgage term and you can have your cover amount match your remaining mortgage balance.
Income protection
Similar to family income benefit, income protection pays out in monthly instalments. However, it pays out during your working life if you’re too ill or injured to work, rather than if you die.
A percentage of your income before tax is paid out on a monthly basis, helping you to keep up with your outgoings while you’re out of work.
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