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Family income benefit is a type of life insurance policy that pays a monthly income to your beneficiaries for the remainder of the term if you pass away while you’re covered. In this guide, we’ll tell you what you need to know about family income benefit, including how it works, the pros and cons, and how to get a policy that suits your needs.
When most people think about life insurance they usually imagine a lump sum payment, used to perhaps pay off a large debt like a mortgage, but life insurance can be set up to allow you to receive smaller, more manageable payments on a monthly basis.
By acting like a salary, family income benefit cover can make a life insurance payout less overwhelming or daunting to deal with. Rather than having to stress about where to keep or invest the money, the regular income can simply be used for everyday expenses, in the same way that a salary would.
Awareness of family income benefit is often lower than more traditional types of life insurance, but its features make it worth considering for many groups of people. Although it's often not as well promoted by insurers as other forms of life insurance, it should not be overlooked.
Family income benefit, sometimes referred to as family income cover, is a type of life insurance that pays out if you pass away during the policy term. What makes it different from other types of life insurance is that your beneficiaries receive a tax-free monthly payment for the remaining duration of the term, rather than one lump sum.
It’s called family income benefit because parents or partners often use it to provide financial support to their loved ones should the worst happen. The family income benefit payments act as a replacement for their salary.
Family income works like traditional term-based life insurance, with one key difference: your beneficiaries receive a regular monthly payout rather than a lump sum payment.
Typically, you can choose from two cover options:
Most policies also come with terminal illness cover. This means that iIf you’re diagnosed with a terminal illness (usually defined as an incurable condition with a life expectancy of 12 months or less), your monthly payments will start. You can also add critical illness cover for an extra cost.
When you apply for family income benefit your insurer will likely ask you to complete a medical questionnaire. If you have any pre-existing medical conditions, such as heart disease or cancer, you must be honest with your insurer at this stage. Holding information back could invalidate your policy.
If you pass away during the policy term, your loved ones can claim on your family income benefit policy. If the claim is successful they will receive a payment every month until the policy expires. Ultimately, the total amount of money that your beneficiaries receive depends on how far into the term you were at the time of your death.
Example: If you take out a family income benefit policy with a cover amount of £2,500 per month for a 20-year term:
As the name suggests, family income benefit is particularly suitable for families with young children. This is especially the case if one parent is the main breadwinner so their lost income would make it difficult for the household to pay bills, meet everyday expenses and maintain their standard of living. The money can also be used to pay for a child’s school or university fees.
However, family income benefit is versatile and can be beneficial for other groups of people as well. This includes couples that rent their home and people who are full time carers or currently pay for home care for their spouse or a relative.
There are several advantages to purchasing a family income benefit plan:
Of course, there are also some downsides to family life insurance. These include:
If you’ve decided that family income benefit is the right life insurance option for you, it’s time to make sure you select the right policy and get the best deal.
Just like traditional life cover, insurers weigh up several factors when quoting costs on family income benefit policies. These factors include:
It is worth keeping in mind that family income benefit premiums are usually lower than a traditional life insurance policy as the total amount the insurer has to pay out decreases as you progress through the term.
One of the most important decisions when purchasing family income benefit is how much cover you will need.
Given the outgoings that many households have nowadays this can be tricky to work out but it is important that you don’t underestimate what you may need. According to NimbleFins the average cost of running a household in the UK is £2,700 a month.
To start, calculate how much income you bring in each month after tax. Next, look at your outgoings such as your mortgage, rent, utility bills, food bills, transport costs and school fees and consider how they might change in the future. For example, will your children be going to university?
You also need to consider that inflation will erode the purchasing power of your monthly payment over the policy term. So, if you’re not opting for increasing term cover, it may be wise to add a buffer zone of 5-10% to your cover amount.
The ideal length of your term will depend on your individual circumstances and the reasons for your life cover.
You’ll likely want to make sure that your term stretches to cover the length of the mortgage on your family home. If you have children, it may be a good idea to have your family income benefit cover them until they’re financially independent.
Read our guide to learn how long you should get life insurance for.
In this section, we’ll explain what happens if you pass away and your loved ones make a successful claim on your family income benefit.
If you are covered by family income benefit insurance and you pass away, your beneficiaries will receive a payment every month directly into their nominated bank account. The amount they receive will be the cover amount you selected when you took out your policy.
Although family income benefit is designed to be paid out monthly, in reality there is some flexibility in how your beneficiaries can receive their payout. If, at the time of the claim, your loved ones suddenly realise that a lump sum better suits their needs, most insurers will allow the regular payments to be converted into a one-off lump sum instead.
However, you should be aware that this option comes with a trade-off: the total lump sum paid will be lower than the total amount they would have received through monthly payments. This reduction reflects the expected return the insurer would have earned had the cover amount been paid over time.
It’s important to know that the payment your loved ones receive from your policy is tax-free income. It is not subject to income tax, national insurance or any other type of deduction.
However, it could be subject to inheritance tax (IHT) as life insurance payments are considered part of your estate and count towards your IHT threshold. To avoid this you can get your family income benefit policy written in trust.
Not all insurers offer family income benefit insurance to their customers. Here’s a brief look at five that do, and how they compare:
If you're looking for the best providers and policies, head over to our guide on the best life insurance companies.
If you believe that the disadvantages of family income benefit outweigh the advantages, but you still think you need some kind of life cover, here are some other options that may be more suitable:
You can read more about the different types of life insurance to pick from in our guide.
While comparing family income benefit policies, you may also come across income protection insurance. The big difference between these two types of insurance is that income protection pays out while you’re still alive, as opposed to family income benefit, which only pays out if you pass away.
Income protection is designed to protect your regular income if you’re unable to work due to sickness or injury. It delivers a monthly payment until you start work again, retire, pass away or the policy expires, whichever happens soonest.
Take time to evaluate your priorities and select the type of income insurance that works best for you. Of course, there’s nothing to stop you from having both types of insurance at the same time.
Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.
Mike is a personal finance copywriter who has written for numerous financial services publications and websites over many years.
Level term life insurance pays out a lump sum whereas a family income policy is designed to provide a monthly income. A level term insurance policy will pay the same amount regardless of when death occurs, unlike family income benefit which more closely resembles decreasing term life insurance, whereby the total overall amount that you will receive reduces the further into the term you get.
Yes. Writing your policy in trust means your payout is not considered part of your estate when you pass away and, therefore, is not subject to inheritance tax. To take advantage of this ability, you must make the proper arrangements when you take out your policy. It’s always best to talk to a specialist insurance broker who can offer impartial advice and ensure you do everything correctly.
You can take out critical illness cover as part of your family income policy or as a standalone insurance product. This provides you with a payout if you are diagnosed with a serious illness like cancer or have a heart attack or stroke. However, some combined policies may automatically expire if the critical illness cover pays out, meaning you’re no longer covered if you pass away. Be clear on what you want from your policy and check the terms of your policy contract.
The length of your family income benefit depends on the term that you pick when you buy the policy. Some insurers will end their policies when you reach a certain age, usually between 80 and 90, so your age at the time that you take out the policy will influence the maximum length of term available to you.
When you purchase a policy, make sure you select a term length that suits you.
Yes. You can cover yourself and your partner on a joint basis, so if either of you passes away, the surviving partner will receive a monthly payout until the end of the term. However, it’s worth remembering that most joint policies only pay out once. Typically, that’s when the first partner passes away. The other partner is then no longer covered.
If you’re still alive when your policy runs out, you are no longer covered. You can’t claim any money back on the premiums you have paid and there is no investment value.
Once your policy expires you should review whether you require a new life insurance policy or whether you no longer need any cover at all.
