Family income benefit (FIB) used to be the name of a government benefit for families, but now it’s the name given to a form of life insurance which is designed to provide a regular tax-free income to your family if you die during the term of the plan. Some people call it family income protection.
This guide will give a detailed overview of what family income benefit is, how it works and the tax rules on money paid out. Is it a better alternative to life insurance or is it something you should have alongside a life insurance policy?
Read on for a comprehensive overview or click a link to jump to the info you want:
Family income benefit is a type of life insurance policy. It is designed to replace your income and protect your family’s finances in the event of your death, if you die within the period of the policy. Instead of paying out a lump sum, the policy will pay out income, usually monthly to your loved ones for a set period of time.
When you take out family income benefit cover, you will tell the insurance provider how much income you want your loved ones to receive and for how long. The insurance company will use this information to work out the cost of the cover.
If you have family income benefit insurance, the policy will pay a regular monthly sum of money to your loved ones for a set period of time, if you die during the term, whereas a life insurance will pay out one lump sum.
Because of the very different ways these two life policies pay out, family income benefit can often work out cheaper.
Why family income benefit can be cheaper
When you buy term life insurance, you are insuring a lump sum to be paid to your loved ones if you die within the term of the policy. With most life policies the sum of money remains the same, no matter whether you die soon after getting cover or in the final months of the policy term.
Family income benefit pays out a relatively small sum every month, so the calculations applied to the premiums you need to pay for your cover are very different to the way insurance providers will calculate regular life cover.
When you apply for family income benefit insurance, you first need to work out the amount of money your family would need to be financially secure in the event of your death.
For example, if your current salary is £2,500 per month then it makes sense to get insurance which will replace this salary exactly. Let’s say you set up a policy which will pay out £2,500 for a total of 30 years. If you die in the first year of buying the cover, your insurance provider will have to pay £2.500 out to your family every month for the whole 30 years.
However, if you died in later years, in year 25, your family would receive the same £2,500 every month but only for the last five years of the policy. If you died after the policy term had ended, the policy wouldn’t pay out anything.
Hassle free income replacement
On top of the potential price advantage, consider how your family might cope if you were to die unexpectedly. If you had a regular life insurance policy, your loved ones would receive a large lump sum payment which would need to be managed properly if it was going last and provide all the financial support needed for years to come.
To deal with such a large sum of money, know how to make it last and deliver the kind of income which might be needed to maintain a financial status quo requires experience and likely need to be invested sensibly in stocks and shares.
Having to handle the stress of this while grieving might be too much for many of us. Family income benefit makes things far easier to cope with.
Payments would kick in and continue to pay a regular tax-free income for the duration of the period you stipulated when taking out the insurance policy, leaving your loved ones free to grieve without the additional stress of having to decide how best to use or invest a large sum of money.
Which is best for paying off a mortgage?
Although the income from a family income benefit policy can be used towards the mortgage, it isn’t the ideal way to ensure your mortgage will be paid off in full in the event of your death.
If your goal is to make sure your loved ones won’t have to leave the family home when you die, most experts would recommend taking out a life insurance policy specifically to pay the mortgage off on death. This way your family will be able to pay off the mortgage in one go and enjoy the benefits of the home without the stress of having to meet the mortgage repayments for years to come.
If you’d like to get expert advice from an independent financial adviser to discuss whether you’d be better off with family income benefit or a life insurance policy, get in touch for a free, no-obligation chat.
Our advisers are regulated by The Financial Conduct Authority and so you will be dealing with a highly trained person that adheres to strict rules of conduct.
You can get quotes from various online sources, but these are unlikely to offer an accurate figure for the true cost of cover. This is because an online calculation is limited by the information provided, so it can’t take into account all the factors an insurance company would use to give you a quote for the cover you need.
The true cost for a family income benefit policy will vary depending on:
- Your health
- Your age
- Lifestyle factors, such as whether you smoke
- The income you would need the policy to pay out
- The period you want to cover
The best way to get an accurate and competitive quote is by using a whole-of-market insurance broker. They have access to all the insurance companies in the UK and have the knowledge and tools to quickly use all the relevant information to generate genuine quotes from numerous insurers.
We work with independent financial advisers who are experts when it comes to insurance designed to protect your family and loved ones. Get in touch for a free, no-obligation chat and they will help you find the right level of cover for the best available price.
Some family income benefit policies offer the option of including cover for critical illness as an addition to the policy, but it is unlikely to be included automatically. If you want cover for critical illness to be included, it’s worth comparing quotes with and without critical illness cover because you may find it more cost effective to buy separate policies.
Talking to one of the independent insurance experts we work with could help you find the most suitable option. With access to all the insurance providers in the UK, they can quickly narrow down the search of family income benefit policies which can include critical illness cover and gather quotes on your behalf.
They will also be able to provide accurate quotes for separate family income protection and critical illness policies.
How to compare quotes
When you’re ready to start comparing quotes you need to understand the premium options which could affect the price you will need to pay for the insurance.
There are several options available, which could influence the price you will need to pay for cover:
- It is possible to get fixed or guaranteed premiums which remain the same for the duration of the policy, or you could choose the option to review them. The reviewable option may lead to cheaper premiums at first, but later down the line you could find the premiums too expensive to maintain.
- You may be able to take out a convertible term plan which would allow you to extend the period you are insured for. In certain circumstances, such flexibility could be useful but it will likely come at a price.
- An index-linked policy could help to protect the amount of income your family would receive in the event of your death. In effect, making your policy index-linked would prevent inflation devaluing the income you have insured. This option may lead to a more costly monthly premium.
- You may wish to include a waiver of premium which will mean your policy will continue unaffected should you become disabled, ill or unable to work for up to (usually) 26 weeks. If you have taken out a waiver of premium as part of your policy and find you are unable to work for a period of time, the insurance provider will cover the costs of your premiums until you are able to return to work, leaving your insurance policy intact and unaffected. Again, this option may make your premiums more expensive, but it may be a valuable option you want to consider.
One of the independent financial advisers we work with would be happy to help you understand all the available family income benefit policy options.
Taking all your circumstances and needs into account, they can advise you of the things you may want to consider when looking at making provisions for your loved ones in the event of your death.
They can gather quotes with and without certain additions to help you get a clear understanding of exactly what you would need to pay for any or all the additional protection options.
If a claim is made against a family income benefit policy, the income payments are usually paid monthly and are tax-free. The money can be spent however the beneficiary chooses, although the insurance is most often used to help cover household bills and maintain quality of living in the event that the main breadwinner dies. Premiums will normally be paid by monthly direct debit.
Can I put it in trust?
Yes, it’s possible to put all types of life insurance policies in trust. This requires a legal arrangement, which most insurance providers will help you set up for free.
It is a good idea to hold life insurance in trust because doing so places your policy outside your estate. This means that when you die your loved ones should get the money quicker because it won’t get caught up in the sometimes lengthy probate process.
If you’re a single parent, family income benefit can be a good way to provide for your children if you die or are diagnosed with a critical illness. A family income benefit policy would help provide the carer of your children sufficient funds to ensure your children won’t suffer due to a lack of money.
To set up a family income benefit policy as a single parent you first need to calculate an annual sum adequate to cover all the financial needs of your child while they are growing up. You would write the insurance policy in trust with the names of your children and the new carer as beneficiaries.
Adding critical illness to the policy or taking out separate critical illness cover might also be something you also wish to consider. Having this additional layer of protection means you can relax knowing you will maintain sufficient income to take care of you and your children should you be too sick to work.
It is usual for the term of the insurance policy to work in line with the ages that you would expect your children to become financially independent. Although this can often feel like it may never actually happen, age 21 is generally considered appropriate. So, if your youngest child is seven when you take out the cover, you would need a policy with a 14 year term.
Family income benefit insurance can be a great way to protect the financial security of your family and loved ones in the event of your death.
To find out more about how much a policy might cost you, and to understand all the ways it might suit your family’s own financial circumstances, talk to one of the experts we work with.
All the experts are independent financial advisers with access to insurance providers across the entire UK. They will be able to discuss your needs and gather and compare quotes for cover which matches your exact requirements.
Call 0808 189 0463 or make an enquiry for a free, no-obligation chat and we’ll match you with an expert who can help.
All the advisers we work with are fully qualified, authorised to give you advice and regulated by the Financial Conduct Authority.