A family income benefit policy is a type of decreasing term life cover with one pertinent difference.
It doesn’t pay out a lump sum in the event of the death of the policy holder. Rather, it pays out a fixed income for the duration that’s left to run on the policy.
What that means is you can take out a Family Income Benefit Policy for the amount you specify, such as the salary of the main earner in the household, as an example to pay £2,000 per month. This will not be indefinite if a claim is made, as the payments from the insurer will stop when the term of your policy expires.
The term durations can be anything up to 20 to 25 years and whenever the expiry date of your cover is reached, the payments from your insurer stops. In layman terms, if you took out cover today on a 20-year term policy, then had to claim one year into it, the policy would pay the monthly agreed amount to the beneficiary for the remaining 19 years that would be left to run on the term of the policy.
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If, however, you took the same policy out and the named beneficiary didn’t need to claim it until 19 years into the policy, the payments made by the insurer would only continue for the remaining one year of the policy. That’s why it’s classed as a decreasing term policy.
In the case of paying off secured finance, it’s often not going to be the case. Larger debts are best protected using a level-term policy, meaning it would pay out a fixed lump sum, regardless when the claim was made, other than any clauses in the policy.
Suitable situations for a Family Income Benefit Policy could be to cover the cost of living expenses for your family. It may be that you would want to know they’d continue to have your wages coming into the household, until at least your children were through college or university.
Or if you have care costs you have to factor into your current outgoings, to know that those costs would continue to be covered for a set period of time. A family income benefit is income protection, more than it is life insurance.
As with most insurance policies, there’s usually the option to add on a level of critical illness cover. This can be added to a Family Income Benefit policy as well.
As this type of cover is decreasing, it is among the most affordable levels of cover you can buy. With the lower cost of premiums, it can work out to be cheaper than a level-term policy, and it will still pay should the policy holder be diagnosed with a terminal illness, if you choose to add critical illness cover to your plan.
The more levels of cover you add to this though, the higher the cost will become. Sometimes to the point that when you finally reach an agreed level of cover that you need in place, the premiums can work out more expensive than if you were to opt for level-term cover, with the same added extras. There are some insurers that will provide additional levels of cover inclusively as added extras to select packages.
Another option you’ll have available is a Waiver of Premium. With that added on, you insure your monthly premiums, so you would know those would continue to be paid by the insurer for the remainder of the policy if you were to be diagnosed with a critical illness, or a long-term illness making you unable to work.
In dual income households, it makes perfect sense in most cases to consider joint policies as it usually works out cheaper, due to the fact the policy ends on the death of one person. The survivor will receive the amount of benefits that’s left to run on the cover, however, it should be remembered that the premiums will only cover the income you agreed to at the time you took the policy out. There wouldn’t be any large lump sum payments made. Just a monthly income for however long is left on the policy.
All your existing financial obligations would still need to be maintained using the income that’s provided from the policy. As they can be arranged on terms as long as 20+ years, always consider the cost of inflation. What you pay just now for any carers, home help, or child care, will rise in the future. As will the cost of energy bills, home repairs, and the majority of living expenses.
A couple of ways you can build a buffer to cover for inflation is to 1) Add a percentage onto the amount of cover you want to keep coming in, such as 5% to 10% above the salary you’re protecting Or 2) Choose a policy that pays out more each year. Both would bump up your premiums, but by how much is what you would need to find out at the quotation stages before applying.
For the most part, a Family Income Benefit Policy is an affordable insurance cover, but as it’s a decreasing term policy and it doesn’t include any lump sums, it’s not suitable for everyone. Nor is it a level of cover that’s widely available as it’s considered a specialised level of protection.
The basic level of cover will provide beneficiaries with an income upon the death of the policy holder. That’s only going to be until the policy expires, then the payments will cease. A 20-year term FIB policy will not pay an income for 20 years. It’s 20 years from the origin date detailed on your policy.
When that expires, the income that would have been being paid to the named beneficiary would stop being paid.