Family Income Benefit Explained (2024)

Family income benefit is a type of life insurance designed to pay a regular income to your loved ones if you die.

But rather than paying out a single tax-free lump sum as a standard life insurance policy would, family income benefit pays a series of smaller monthly amounts (also tax-free). Its aim is to replace lost income if the breadwinner was no longer around.

Alternatively, if one person in a couple looks after the home and family, the money paid out could be used to pay for those tasks to be carried out by someone else. This means the earning partner could continue with their paid employment.

That is why it is important to take out insurance for both partners in such a family unit, even if only one of them goes out to work.

That means choosing between a ‘joint’ policy and individual policies (more on this below).

How does family income benefit work?

If you take out a family income benefit policy, you’ll need to state how much income you would like your family to receive and over what period of time. You’ll then pay a monthly premium in return for this cover – and, as you might expect, the larger the monthly pay out, the higher this premium will be.

As an example, you might decide that your family would need a monthly income of £2,500 to be comfortable financially if you passed away. And you might decide you’ll need that cover in place for 20 years.

If you died 10 years into the policy, your family would then receive their monthly income of £2,500 for 10 years. If a claim were made after 15 years, your family would receive their monthly income of £2,500 for five years.

Should you die after the 20-year policy term, no claim could be made and no pay-out would be awarded.

Are family income benefit payments index-linked?

When you take out family income benefit, you’ll usually have the option to increase the value of your policy in line with inflation. This helps to ensure the amount of income your family would receive keeps up with rising living costs.

After all, £2,500 this year would probably go a lot further than £2,500 in 10 years’ time.

Who is family income benefit designed for?

As the name suggests, family income benefit is often best suited to those with young children, although it can be taken out by anyone with dependants.

It is a useful option because, with a life insurance policy that pays out one single sum, it can be difficult to calculate how much cover is required to provide for the family’s financial needs over a period of time.

Additionally, should a claim be made, families can find it challenging to manage a one-off lump sum at a time when they are also grieving. As well as having to budget for immediate financial needs, the rest of the lump sum will need to be invested or saved elsewhere.

As a result, family income benefit can be much easier to manage and more appealing to those who want to ensure their loved ones would receive a straightforward monthly income to help pay household bills and other day-to-day expenses, and to fund looking after the home if necessary.

How long should family income benefit last?

The length or term of your family income benefit policy is ultimately up to you. Many people choose to have cover in place until their children will be old enough to be financially independent, although that in itself can be a judgment call.

Others prefer the cover to last until they reach retirement age.

How much does family income benefit cost?

Family income benefit is generally cheaper than standard life insurance, which is another part of its appeal. This is simply because traditional life insurance pay outs remain the same, no matter when a claim is made during the life of the policy.

With family income benefit, on the other hand, the insurer may not have to pay out such a large sum on account of the fact that any claim would likely be made some time into the term of the policy. And with family income benefit, the claim certainly wouldn’t be paid in one go.

However, like standard life cover, your family income benefit premiums will still depend on factors such as:

• your age
• your health
• whether you smoke
• the size of income you want the policy to pay out
• the duration of the policy.

What are ‘joint’ and ‘individual’ family income benefit policies?

A joint family income benefit policy will cover two partners but it will only pay out once, typically after the first policyholder dies. The surviving partner then has no life insurance cover under that policy and must rely on other policies, if there are any, or take out a new one.

The problem with this is that, the older you are, the higher the premiums will be, so any new policy could be relatively expensive.

With individual policies for each partner, each policy pays out separately, so your dependants would get two pay-outs if both policyholders were to die during the term of the policy.

You can arrange individual policies with the same insurer at the same time, so it is effectively one arrangement covering you both. But because of the potential double pay-out, this option is highly likely to cost more than a joint policy.

Do the premiums remain the same?

When you take out a family income benefit policy you’ll usually be asked whether you want ‘guaranteed’ or ‘reviewable’ premiums.

Guaranteed premiums stay the same for the whole term of the policy, whereas reviewable premiums may be cheaper initially but increase over time as your insurer reviews them and perhaps makes adjustments based on your age at the time.

Does family income benefit include critical illness cover?

Some family income benefit policies will give you the option of adding critical illness cover, but you’ll need to pay extra for this (it’s unlikely to be automatically included). Critical illness pays out a tax-free lump sum if you’re diagnosed with an illness or medical condition specified on your policy.

If you’re interested in including critical illness cover with your family income benefit policy, it may be worth comparing the price for two standalone policies and the price of a combined policy to see which is cheaper.

What are the alternatives to family income benefit?

There are a number of different protection policies to consider either alongside family income benefit, or as an alternative to it.

One option is to combine a family income benefit with critical illness cover, or with one of the various types of life insurance. A decreasing term life policy for example, can be set up to clear mortgage debt if you died within the term.

Income protection policies, such as permanent health insurance, can also provide a financial safety net for loved ones if you were unable to work due to serious illness or an injury or accident.

Many employers offer death in service benefit too so, if you are working, bear this in mind when planning your protection cover. If you’re unsure if you have this benefit, it’s easy to find out via your company’s human resources department.