Family income benefit insurance explained

What is family income benefit insurance?

Family income benefit is a special type of life insurance policy.

Generally, with life insurance, your loved ones will receive a lump sum payout from your policy when you die. It's then up to them to handle that money as they wish.

With family income benefit, your loved ones will instead be paid a regular income for a set period to replace the lost income. Read more about the best life insurance policies.

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Looking for more information on types of life insurance? Read our guide on what is life insurance?

How does family life insurance work?

When you take out a family income benefit policy, you stipulate what income you would need your loved ones to receive, and over what time period. The insurer will work out what monthly premium you would need to pay in order to secure that cover.

At the outset, figure out what sort of income would be needed your family to be financially stable should you pass away.

Let's say that your family would need £2,000 a month for the next 30 years in order to be secure were you to die.

• If you died in the first year of the policy, the insurer would pay out that sum for the full 30 years of the policy
• If you died in year 25, they'd receive £2,000 a month for the final five years
• If you die after the term of the policy has finished, there will be no monthly payout to your loved ones

• Find out more: Accidental death insurance and cover explained

How much will family life insurance cost?

Family income benefit is generally seen as the most affordable form of life insurance available.

This is because the insurer is less likely to have to pay out a significant sum, and even if they do they won't need to pay it all in one go.

In comparison, a term life insurance policy pays out entire sum agreed should you die during your term, no matter whether that's during the first year or the last, while a whole-of-life insurance policy guarantees that there will be a payout at some point.

However, the actual cost of a policy will vary based on issues including your health and lifestyle, your age and what size income you would want the policy to pay out.

How long does family income benefit pay out for?

You decide the term. If you die within that term, your family income policy will pay out from then until the end of the term.

Is family income benefit cheaper than level term?

Family income life insurance is cheaper than level term life insurance. It is a type of decreasing term insurance as the total amount that would be paid out if you die later in the term would be lower.

Is family income benefit increasing term?

You can set the monthly benefit to increase so the monthly payout should you die rises each year. However, if you die in year 20 of a 25-year term, although the monthly payments would be higher than at the start of the policy, the total amount paid out would still be lower.

Is family income benefit taxable?

Family income benefit is not taxable.

Can family income benefit be paid as a lump sum?

No. It is a monthly payment until the end of the term.

Does family income benefit cover critical illness?

Critical illness cover can be added to a life insurance policy or be bought separately.

Family income benefit vs income protection

Family income benefit will provide your loved ones with a monthly pay out if you pass away. Income protection insurance, on the other hand, will pay out a monthly amount if you are unable to work, perhaps due to illness.

• Find out more: what is income protection insurance?

Who is family life insurance suitable for?

There are several advantages to getting a simple, regular income over a lump sum:

• To make a lump sum last, it may need to be invested in the stock market
• You may need the money sooner to deal with new, additional costs such as childcare
• A regular sum can make it easier to handle budgets and bills at a difficult time
• You can set the income to last until you expect the children to be financially independent.

Who isn't family life insurance suitable for?

Many people take out a life insurance policy so that if they die during the term of the cover, their loved ones will be able to pay off the mortgage in one go and enjoy outright ownership of the family home.

That isn't an option with family income benefit. While the monthly payment may be enough to cover the mortgage bill each month, it will likely take many years to pay off the home loan entirely.

This will mean that the surviving partner will be left to handle decisions over things like when to remortgage.

Over the course of the policy, the payout that your loved ones would receive will fall significantly. Taking our example above, if you died in the last year of the policy, your loved ones would only receive a total of £24,000.

If you want to ensure that your family receives a more substantial payment, no matter when you die during the course of a life insurance policy, you will be better off with a term life insurance or  whole-of-life insurance policy. And, if it is just you and your partner you may be interested in a joint life insurance policy. 

• Find out more: can I take out life insurance if I have diabetes?

Can I get a joint family income benefit policy?

Family income benefit is available both on an individual and on a joint basis.

If you go for a joint policy, there will only be one set of income payments, usually after the first policyholder dies, so long as they die during the term of the policy.

As a result, while two individual policies will be more expensive than a joint family income benefit policy, separate policies would ensure that there are two sets of income payments should both parents die during the term of the policy.

• Find out more: are multiple insurance policies worth it?

Are my premiums guaranteed on a family life insurance policy?

When you take out family income benefit, you will usually be given a choice between guaranteed and reviewable premiums.

With guaranteed premiums you will know for certain exactly what your payments will be for the entire term of the policy - they won't ever change.

With reviewable premiums, while they may cost less initially, the insurer will review them on a regular basis and may choose to increase them. As such, there is a danger that they may become unaffordable at some point.

• Find out more: How much is statutory sick pay? 

Are my family income benefit payments index-linked?

Inflation is an important thing to consider when working out what sum your loved ones would need to get by each month should you pass away. With the cost of living constantly rising, the money they receive may need to go further as the years pass.

You have to option to increase the value of your family income benefit with inflation to ensure that the value of the monthly payout meets rising costs. This will likely increase the cost of your premiums at the outset.

• Find out more: what is over 50s life insurance?

Can I write family life insurance in trust?

All life insurance policies can be written in trust, including family income benefit. This is a legal arrangement, that is absolutely free, and essentially means that the policy is viewed as being outside of your estate when you pass away.

This should mean that your loved ones receive the money quicker, as it sidesteps the probate process.

Find out more in our guide to how to write life insurance in trust.