This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
We have all heard of life insurance – but what about family income benefit? For those with small children or other dependents, this can be a great option to boost your financial protection should the worst happen. In this guide, our team at Elmfield (financial planners in Padiham, Burnley, Lancashire) explains how family income benefit works, how it differs from life insurance and how it can be a useful component in a wider financial plan. We hope this is helpful to you. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Family income benefit, explained
Commonly, a life insurance policy pays out a lump sum when you die. This can be used by your surviving loved ones, for instance, to help tide them over as they re-establish their finances and lives. The lump sum could also be used to help repay the mortgage, taking away a big monthly outgoing. However, for many families managing a lump sum like this would not be suitable.
During a time of grieving, it may be challenging for your loved ones to think clearly about what to do with a lump sum from a life insurance policy. Therefore, family income benefit can be a better option – providing a regular income rather than a big sum of money. In effect, this acts as a new “salary” (or income) for your family – making it much easier to keep on top of the monthly bills.
Similarly to life insurance, you can specify how long you want the policy to last (the “term”). This could be set to expire, for instance, when your youngest child reaches their 18th birthday – when he/she could, realistically, start earning and living independently. Alternatively, you could set the end of the policy at your planned retirement date – when you expect to start living off pension income, rather than a salary. A financial planner can help you discern the best options here.
Who is family income benefit not suitable for?
Naturally, if you do not have children or other dependents, then family income benefit likely is not necessary for you. However, there are other cases where it may not be useful.
For instance, those with a mortgage to pay may prefer a life insurance policy to settle the debt should one (or both) adults in the household die prematurely. This is not possible with a family income benefit policy, which provides a monthly income rather than a lump sum. In this case, it may take him/her several years to continue repaying the loan, and they would need to choose if/when to remortgage.
It’s also worth considering that, as your family income benefit policy gets older, your loved ones would receive less compared to if you died at/near the start of the policy. For instance, suppose your policy would provide £2,500 per month to your family over 25 years if you died immediately after taking it out. However, if you died at year 20 of the policy, they would only receive 5 years’ worth of annual income (rather than 25).
With a life insurance policy, however, your family would still receive the full lump sum regardless of when you died within the term.
Insights & suggestions
In addition to this, there are some other important aspects of family income benefit to consider.
First of all, you can take out family income benefit on a single/individual or joint basis. If you go for the latter, then your surviving loved ones always receive one set of payments – even if both adults in the household die during the term.
The former, however, could allow for two sets of payments in such a scenario. The total monthly premiums will almost certainly be higher, but this may be necessary for some households (e.g. if both parents work to cover the monthly expenses).
Secondly, you need to consider whether you want “guaranteed” premiums, or not, for the policy. If you take this route, then you have peace of mind that you always know what your premiums will be. On the other hand, reviewable premiums typically offer lower premiums in the first years, but the insurer can choose to increase them later in the policy term.
Thirdly, you should factor inflation into your family income benefit policy. For instance, a policy may offer £2,000 per month when it “activates”, but in 10 years the value of £2,000 is likely to go down as the cost of living rises. Here, you can protect the value of your payments by choosing a policy which links them to inflation. However, this is likely to come at a higher premium.
Finally, consider how your family income benefit policy should feature within your estate plan (to account for inheritance tax, or IHT). By writing your policy into a trust, you can help ensure that the policy is deemed to “sit outside” your estate when your executors work through your estate after your death. This can make it easier and faster for loved ones to start receiving the monthly payments (as the probate process is bypassed). However, consider seeking financial advice to make sure you set all of this up properly.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
