Family Income Benefit pays out a regular tax-free income on death for a set period of time.
Many individuals consider Family Income Benefit to ensure that if the worst were to happen their partner and children’s standard of living can be maintained until they are of an age where they become self sufficient.
It’s designed to cover all day-to-day living expenses, including:
- Food
- Rent / mortgage repayments
- Utilities
- Property taxes and related bills
- Car running costs
- School fees etc.
It provides a more manageable legacy for your loved ones, offering regular income support rather than one large lump sum.
It is often set-up alongside mortgage life insurance. The mortgage life insurance pays out a lump to clear the outstanding mortgage balance while the family income benefit covers the regular monthly expenditure your loved ones will still need to meet.
Do I Need Family Income Benefit?
Family Income Benefit, just like any Life Insurance, is designed to benefit your loved ones should you pass away.
Many people turn to Life Insurance because they have a liability, such as a mortgage, that they’re keen to protect. Others want to leave money for their family.
Whatever the reason – or combination of reasons – you’re looking for Life Insurance, it’s important to understand the risk we all face.
What’s the Risk of Passing Away?
Based on ONS life expectancy data, a man with a 25 year mortgage term would have the following chances of passing away before the loan is repaid:
Could Your Family Meet Their Financial Obligations Without You?
If you’re unsure about how essential outgoings would be met or believe your family would face significant hardship after you pass away, it’s sensible to look at ways you can protect their standard of living.
Family Income Benefit may be of particular use to those with children but no partner, as rather than leaving a large lump sum to children who may spend it unwisely it provides a steady income.
This income can see them through until they are of an age where they are out of full-time education and able to stand on their own two feet.
Protecting a House Person
Even where one partner doesn’t work and takes care of the children and home, you may still want to consider insuring them. That’s because the work they do in the home would likely have to be replaced with paid employees if the surviving individual needs to continue working and earning.
How Much Does Family Income Benefit Cost?
There are a number of factors that will determine the cost of Family Income Benefit, some of which are key policy factors you can control, such as:
- Level of cover
The more cover you require the higher the premium for the policy.
- Length of cover
The longer the policy term the higher the risk of needing to claim and this is reflected in higher premiums.
- Including critical illness cover
As the risk of suffering a serious illness such as heart attack, cancer or stroke is far higher than dying you can expect significantly higher premiums.
Other personal factors that you have less control over which will still impact on the cost of your policy include:
- Your age
The older we are, the greater the risk of passing away during the term of the policy
- Your current state of health
Those with severe health conditions, especially those which might limit life expectancy, will typically pay more for Life Insurance to reflect the greater risk the insurer is taking on
- Your smoker status
If you smoke, you’re at greater risk of developing a serious, fatal health condition and so insurers will charge more
- Lifestyle and hazardous activities
Lifestyle habits, such as regularly drinking more alcohol than is recommended, or participating in hazardous activities, could result in an insurer increasing the cost of your cover
- Family history
Has any of your immediate family ever suffered a serious and/or hereditary illness that may impact you? If so, you may pay more for life cover.
You can use our Family Income Benefit Calculator tool to get instant online quotes from the UK’s leading insurers including Aegon, Legal & General and Royal London.
How does Family Income Benefit work?
Family Income Benefit works in a very similar way to Life Insurance.
You take out cover for an agreed sum and pay the premiums. If you pass away during the term of the policy, your family receives a payout from the insurer.
The major difference between Life Insurance and Family Income Benefit is how you receive the payout. Whereas with Life Insurance your beneficiaries get the payout as a single lump sum, with Family Income Benefit the payout is split into a more manageable income for the remainder of the policy term.
So if you passed away in year 10 of a 20 year policy, your loved ones would receive the agreed benefit on a regular basis for the next 10 years, allowing them to keep up with their outgoings and not have to worry about what to do with one large Life Insurance lump sum.
Should both parents get Life Insurance?
This depends on your circumstances, but in many cases it may be beneficial for both parents to have an element of Life Insurance cover, even if one partner isn’t working and is a stay-at-home parent looking after a family.
This is because if a stay-at-home parent passes away, all of the childcare and domestic upkeep responsibilities will fall to the surviving parent, who may be the breadwinner and unable to juggle these responsibilities with earning a living to support their family.
If a stay-at-home parent has Life Insurance, this will allow for someone to be hired to replace their domestic duties while the surviving parent continues to work and support their family.
Can we get joint Family Income Benefit?
Single cover protects the life of just one individual, whereas a joint Family Income Benefit policy covers two lives under the same policy.
Why Get Joint Life Family Income Benefit?
If neither yourself nor your partner could survive without the other’s income to maintain your standard of living and keep up with essential monthly outgoings, you might want to consider protecting both parties.
It’s important to remember that joint policies only pay out once, typically on the death of the first individual. You may therefore want to consider two single policies, securing potentially twice the payout for minimal additional premium.
Total premiums are typically only around 10%-15% per month higher if you arrange cover this way compared to a joint policy even though you have twice the cover.
Can I get Family Income Benefit with Critical Illness Cover?
Most Family Income Benefit plans provide the option to add Critical Illness Cover. This means the policy would not only pay out if you were to die but also if you were to suffer one of a defined list of critical illnesses.
The major three claims on Critical Illness policy are for cancer, heart attacks and strokes, making up around 80% of all claims.
Other common claims include multiple sclerosis and Parkinson’s disease.
Most Critical Illness Insurance policies cover around 40 ‘critical’ conditions. However, it pays to read a policy carefully because there are plans that cover more than 100 and others which cover fewer than 10.
Income Protection or Family Income Benefit with Critical Illness?
In some circumstances it may make more sense to take out a separate Income Protection plan in addition to Family Income Benefit rather than adding Critical Illness Cover to your FIB policy.
Income Protection is generally considered more comprehensive illness cover given it covers any accident or sickness which keeps you out of work.
That illness or injury doesn’t have to be ‘critical’ or listed in the policy terms – with Income Protection, anything that prevents you from working will be covered.
For more information read our guide Income Protection vs Critical Illness Cover.
Is Family Income Benefit taxable?
The regular income you receive from a Family Income Benefit policy isn’t subject to income tax; it is paid tax-free, so you don’t have to worry about grossing up the benefit.
However, your Family Income Benefit Insurance could be subject to inheritance tax, which is why we’d suggest writing the policy into trust.
Can I put Family Income Benefit into trust?
It’s possible to write a Family Income Benefit Insurance policy into trust; it’s even advisable in many cases to avoid inheritance tax on the benefit.
For inheritance tax purposes HMRC will ‘gross up’ your Family Income Benefit’s monthly payments to equal a total lump sum.
This means even a modest £12,000 a year benefit (£1,000 a month) over 25 years would become a £300,000 lump sum for tax purposes.
When added to the rest of your estate, such as your home, this could easily exceed the inheritance tax threshold and could therefore have inheritance tax implications.
By setting up a trust, it’s the trust that receives the benefit and the payout can then be distributed from there, bypassing the deceased’s estate and therefore inheritance tax.
Writing your Family Income Benefit into trust from the outset is one way to ensure it remains outside your estate and will be paid free from inheritance tax when your loved ones need the cash the most.
What are the disadvantages of Family Income Benefit?
- It does not provide immediate funds to meet any potentially large expenses should the policyholder pass away.
- Although not necessarily a disadvantage, Family Income Benefit only pays out an income for the time remaining on the policy term. This means if you die in the 25th year of a 30-year policy, your family will only receive an income for 5 years.
What’s the difference between Family Income Benefit and Level Life Insurance?
Level Life Insurance
Pays out a lump sum on death that remains equal across the life of the policy, from the first year to the last. Typically used to cover an interest-only mortgage, where the outstanding capital balance of your debt doesn’t fall over time.
Family Income Benefit
Provides your family with a regular monthly income if you were to pass away or become critically ill. Covers your family’s core monthly expenses, from utilities to groceries, until your children are grown up should you die.
Family Income Benefit Quote Comparison
Get Family Income Benefit Quotes & Expert Advice
We are here to ensure you and your family don’t miss out on financial security because appropriate insurances were not put in place. Our experts aim to help provide you with the necessary information to make an informed decision.
If you are still researching then you can use our calculator to compare family income benefit quotes or have a look at the related guides below.
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