Life insurance policies typically pay out a lump sum to the policyholder's beneficiaries following his or her death. But if you think your family would benefit more from a regular income rather than a large windfall, you can opt for a life insurance policy with a family income benefit - one that delivers regular (monthly or annual), fixed, tax-free payments should you die during the policy term.
A family income benefit is a term life insurance product that can provide a replacement for the salary you were bringing in, giving your family financial security until the policy expires.
How do family income benefit policies work?
With a family income benefit policy, you pay monthly premiums in return for an income paid to your survivors should you die during the policy term. Following your death, the insurer will pay your family an income, either monthly or yearly depending on the specifics of your policy, for the remainder of the policy term.
For example, if you take out a 30-year policy and then die five years into it, your family would receive payments for the next 25 years. But if you die 28 years into the term, the payments would be limited to the last two years of the policy.
Premiums on these policies are either guaranteed, meaning they'll stay fixed for the length of the policy, or reviewable, which means they will be reviewed by the insurer at set intervals - typically every five or ten years - and adjusted, usually upward.
Family income benefit policy exclusions
As with all life insurance products, some types of death, such as those from suicide or drunken accidents, will be excluded from family benefit policies and any claims rejected. Fail to keep up with the premiums on your policy or misrepresent your health or smoking habits in the application and underwriting process, then your policy will be cancelled, and any claims denied. It's important to read the terms and conditions of any life insurance policy before committing to it.
How much would a family income benefit policy cost?
The cost of a family income benefit policy will depend on several factors:
- the age at which you take out the policy: the older you are, the higher premiums you'll pay.
- your health: having pre-existing medical conditions, smoking, or drinking in excess of recommended guidelines will increase your premiums. Some pre-existing medical conditions, like diabetes, especially if badly managed, may make it difficult for you to obtain insurance except from specialist providers.
- the length of the term: the longer the policy term, the higher the premiums.
- the amount of the income: the most generous the potential income, the more you'll pay for the insurance.
What level of benefit should I choose?
It might be tempting to take out a policy that provides your family with a lavish income following your death, but the premiums on such a policy would be steep. Consider the essential monthly expenses your family would face after your death and get enough insurance to cover those. You might decide to match the level of your family income benefit with your monthly take-home salary.
You might want to consider an index-linked policy, to ensure inflation doesn't erode the value of pay-outs you might not expect for several decades.
You'll also have to consider how long you'd like the policy to last. Many families sync the terms of these policies with the ages of their children, so the policy expires when their youngest child leaves the family home and becomes independent - typically in their late teens.
Alternatives to family income benefit
A family income benefit policy is similar to a decreasing term life insurance policy in that the total you'll receive decreases as the years go past. This isn't the policy you want to choose if you want to ensure the highest level of coverage.
Like other term life insurance products, these policies also expire. If you want to ensure your family receives a payout no matter when you die, possibly to cover funeral expenses or if you have lifetime caring obligations, you might want to explore a whole of life policy, also known as assurance. These policies will deliver a fixed payment no matter when you die - next year after paying just a few months of premiums or after decades of diligent payments.
Family income benefit might not be suitable if the primary expense your surviving dependents would face would be payments on a large debt, including a mortgage. While a family income benefit could allow your family to continue making mortgage payments, it would be cheaper in the long run for them to receive a lump sum with which to pay off any outstanding balance in the loan, rather than accruing years of interest on it.
In that case, you may also want to obtain a decreasing term life insurance policy linked to the mortgage. In fact, some lenders will require you to obtain one on joint mortgages, as a condition of the loan.