How family income benefit works

Family income benefit does what it says on the tin, compared to, say, life insurance which would more aptly be called death assurance. In broad terms, family income benefit is a means of providing a regular income for family dependants in lieu of, or in addition to, any lump sum payable on the death of a life insured parent.

The level of income, dependent on monthly premium previously made will be paid each year from time of death of the life assured until expiry of the selected term, whether 10, 15 or 25 years. Income instalments can usually be paid monthly, quarterly or annually and are free of tax.

Family income benefit is eminently suitable for young families when there is need to provide insurance cover in the event of loss of a deceased spouse's or partner's income. Life isn't fair and death can be random and sudden, but dependants still need to be cared for.

The mortgage is likely to be covered by its own protection policy, but the death of an earning partner usually means a significant drop in monthly household income. Equally, if the deceased wasn't earning, i.e. a full time mother and housewife, the consequences can still be serious. The remaining partner will usually have to carry on working in order to fund child caring and housekeeping. This is why family income benefit is particularly right for both parents of young children, whether or not both are earning.

Such a way of providing benefit is also helpful to those beneficiaries who are not used to, or do not want to handle, the (presumably) large one-off lump sum of a life insurance payout.

Easing the bereavement

A time of grief is not the best time for a surviving partner to enter into lifestyle financial planning, to work out how best to invest the lump sum to generate required family income. In this respect family income benefit is a simple and direct alternative, obviating the need to assess in advance potential investment returns as well as removing the spending temptation presented by a large sum of money. Better still if the benefit is index-linked in some way.

With some policies there's the flexibility of opting for a mix of lump sums and income at chosen regularity; a final lump sum would be equal to the present value of future income payments, but may be constrained by prevailing interest rates at the outset.

A family income benefit policy is generally cheaper to buy than lump sum term life insurance cover. Why is it cheaper? The amount of cover in effect lessens over the term of the policy; the nearer the life insured gets to the term expiry date, the smaller the liability of the insurance company.

Death late on in the term of a family income benefit policy may well be bad news for the beneficiaries in more ways than one as there will be only a few payments before the term expires. The deceased can't start another term and there is no cash-in value for an family income benefit. Also, payment of premiums must be maintained before death or the policy ceases and then no benefit is payable.

Another perceived disadvantage is that medical evidence is usually required (possibly an examination) prior to taking out such a policy. And, of course, unless they are specifically linked to inflation, the benefit payments will decrease in real terms over the duration of the payout.