Family income benefit is a form of life insurance policy designed to provide a regular tax-free income to your family in the event that you pass away. It used to be the name for a type of government benefit for families but it now specifically refers to this type of life insurance – some people go with the name family income protection. Read on to get a detailed overview of everything you need to know about family income benefit, how it works, what the tax regulations are and how money is released.
It’s important to interpret whether it would be a good alternative to a life insurance policy or whether it would be better to have the two running concurrently. There are various options for additional protections with family income benefit and you need to work out the most cost-effective option available. As always, if you have any further questions about what you read in this guide, don’t hesitate to contact Think Plutus and we’ll be happy to help.
What is family income benefit insurance?
Family income benefit is a special type of life insurance product. Its purpose is to replace the income you were bringing home to your family if you die in order to protect them against financial stress. Rather than paying out a single lump sum, family income benefit pays out a regular income – usually monthly – over a set period of time to support your loved ones.
When you take out family income benefit insurance, you will give instructions as to the amount of money your loved ones will receive and the length of time they will continue receiving it. These will be the main factors determining the cost of the cover.
Family income benefit vs life insurance
With family income benefit, your loved ones will have the support of a regular monthly income over a set period of time to help keep them going. A life insurance policy, on the other hand, pays out a single lump sum that your family can do with as they wish.
This difference in the way the two policies pay out can mean that family income benefit is often cheaper to take out.
Why family income benefit may be cheaper
When you take out standard life insurance, your policy will pay out a significant lump sum to your family if you die within the term of the insurance. This sum typically remains the same, no matter how long after taking out the cover you die.
With family income benefit, a relatively small sum is paid out every month after you die, meaning the calculations that establish the premiums for cover are very different to those in standard life insurance.
Whilst applying for family income benefit, it’s down to you to define the amount of money that would enable your family to be financially secure when you’re gone. So, if your current salary stands at £3,000 per month, it might be prudent to take out insurance that matches this monthly income. So if you set up a policy that would pay £3,000 per month for a total of 30 years, then you die within the first year of taking out that cover, your family would receive that £3,000 payment every month for the full 30 years.
If, however, you lived 25 years after taking out the policy then, after your death, there would only be 5 years left, so your family would only receive the income for the remaining 5 years. If you die after the end of the policy term, it would pay out nothing.
No-stress income replacement
In addition to the potential price advantage, spare a thought for how your family would cope if you were to die suddenly. With a standard life insurance policy, they would receive a large lump sum that would require discipline and careful management to continue providing financial support for the long-term.
A large sum of money can only be made to last and deliver that all-important income with financial experience. Investment in stocks and shares would be a good solution, but that is complicated and may require the assistance of an expert.
Having to deal with this extra hassle whilst grieving might be overwhelming for many people. With family income benefit, the whole thing becomes far easier to cope with.
The regular payments would kick in right away, providing that regular tax-free income on autopilot for the duration of the policy term. This would mean your loved ones could grieve and heal without the added hassle of working out the best way to make a large sum of money work for their finances.
Which works best for paying off a mortgage?
Although the regular income from a family income benefit policy can be used to keep up with mortgage payments, it won’t enable your family to quickly pay off the mortgage in full if you die.
If you want to feel certain that your family won’t be forced to leave their home after you’re gone, most experts would advise you to take out a life insurance policy aimed specifically at paying off the mortgage when you die. This will enable your loved ones to pay off the mortgage all at once so that they can enjoy the family home without the stress of making mortgage repayments for many years to come.
If you’d like advice tailored to your situation from an expert independent adviser, contact Think Plutus for a free, no-obligation chat. We are regulated by the Financial Conduct Authority, so our advisers always adhere to strict rules of conduct. We can help you ascertain whether a family income benefit or life insurance policy will be better for you.
Can I get a quote?
There are various online sources where you can get quotes, but it is unlikely any of these will provide an accurate figure for how much your cover would actually cost, or if the policy would be suitable for your personal needs and circumstances. This is because these online calculations are made on the basis of limited information, so the full range of relevant factors aren’t taken into account.
The accurate cost of a family income benefit policy will depend on things like:
- Your health
- Your age
- Your lifestyle – are you a smoker? Drinker?
- The income you want the policy to pay out
- The term of the cover you want
The best way to obtain an accurate and highly-competitive quote is to consult a whole-of-market insurance broker like Think Plutus. We have access to the full UK market of insurance companies that provide this type of cover, along with all the tools and expertise to quickly gather all the relevant information to obtain accurate quotes from multiple insurers.
Our expert advisers understand the ins and outs of the different insurance types aimed at protecting your loved ones. Contact us today to arrange a free, no-obligation consultation and we will help you get an accurate picture of your best options and what they would cost.
Is critical illness cover included?
Some family income benefit policies will have the option of incorporating critical illness cover as an add-on, but you probably won’t find any that include it as standard. If you want to include critical illness cover in your policy, it would be wise to compare quotes with and without that extra cover – it may well be more cost-effective to take out separate policies.
Think Plutus could help you explore your options to identify the best solution for you. With access to the full market of UK insurance providers, we can swiftly narrow down your search for family income benefit policies that have the option of adding critical illness cover. We can then present you with accurate quotes and help clarify what your best option would be. This would include quotes for taking out separate family income protection and critical illness policies.
How to compare quotes
When you’re ready to start the process of comparing quotes you must have a good understanding of the premium options that will impact the price of the cover you want.
There are various options available that will have an effect on the price you pay:
- There are fixed and guaranteed premium, which remain the same throughout the term of the policy, or you could include the option to review them after a period of time. With reviewable options, the premiums may be cheaper to begin with, but they could become more expensive later on.
- A convertible term plan may be an option, wherein you may extend the period you are insured for. In some circumstances, this flexibility can be useful, but it usually comes at a price.
- Index-linked policies can protect the level of income your family receives if you die. Effectively, an index-linked policy is inflation-proof, but it may mean the premium is higher.
- Another option is to include a waiver of premium so that your policy continues unaffected in the event that you are incapacitated and unable to work for up to 26 weeks. If you include this option in your policy and are subsequently unable to work for a time due to illness/injury, your insurer will cover the cost of your premium until you can return to work. This means your insurance policy remains intact, but that additional peace of mind may make your premiums more expensive.
One of our expert advisers will be happy to work with you to ensure you understand all the policy options for your family income benefit application. We will get a good picture of your circumstances and needs in order to advise on the options that may be a good fit for you and your family.
We can then gather quotes for the various possibilities to help you understand the cost of different policy structures with and without additional protections, enabling you to make an informed decision.
Is family income benefit taxable?
If a claim is made on a family income benefit insurance policy, the income payments are usually released monthly and are completely tax-free. The money can be spent at the discretion of the recipient, though it is usually put towards household bills and maintaining a certain lifestyle if the household’s main breadwinner passes away. The money is usually paid by direct debit.
Can it be put in trust?
All forms of life insurance policy can be put in trust. A legal arrangement must be made to do this, and most insurers will provide the service of setting this up for you free of charge.
It is wise to hold life insurance in trust because this places the policy outside of your estate. This way, if you die, your loved ones should be able to access the money more quickly because it will not be subject to a frustrating probate process.
What if I’m a single parent?
For single parents, family income benefit can be a great way to continue providing for your children if you die or fall critically ill. With a family income benefit policy, the person who cares for your children after you are gone would have the necessary funds to ensure your children never go without due to lack of money.
To start a family income benefit policy as a single parent, the first thing to do is work out exactly how much money would be needed to provide everything your child/children need as they grow up. The insurance policy would be written in trust, naming your children and their new guardian as beneficiaries.
Adding critical illness cover to the policy, or taking it out separately, may also be worth taking into consideration. This extra layer of protection will give you the peace of mind of knowing your income will remain sufficient to cover your needs and those of your children if you become too sick to work.
It is common for the term of an insurance policy to operate in line with the ages your children would be expected to achieve financial independence. Of course, it can feel like that might never actually happen, but 21 is often considered an appropriate age to define. This means that if your youngest child is 7 when you set up the policy, you would give it a 14-year term to cover until that child reaches the age of 21.
Speak to the experts
Family income benefit is a great option if your aim is to protect your loved ones against financial hardship in the event that you die. The information in this guide is generalised but every situation is different. If you want to get an accurate picture of what different policies would cost you, and of how they would provide for your family’s finances, contact Think Plutus and speak with one of our expert advisers.
We are regulated by the Financial Conduct Authority and every one of our specialist advisers has access to insurers across the entirety of the UK. They will take the time to discuss your needs at length and gather all the pertinent information to advise on the best types of insurance and obtain accurate quotes for your ideal cover.
Get in touch today to arrange a free, no-obligation consultation and you’ll get to talk everything through with one of our team. Rest assured that every adviser at Think Plutus is fully qualified and authorised to provide quality professional advice on your insurance options.
For family income benefit advice that will make it easy to see the best way forward, Think Plutus.