Ever heard of an Insurance plan that gives your family a monthly income instead of a one-off payment?
That’s Family Income Benefit (FIB) for you.
It’s a unique way to make sure your loved ones have steady financial support when times get tough. Read on to find out how Family Income Benefit insurance works and who it is suitable for.
It could be a smart choice for your family’s future.
What is Family Income Benefit Insurance?
Family Income Benefit, or FIB, is a type of term insurance Policy.
You are probably already aware of a level term insurance policy that pays out a lump sum should one of the policyholders die.
Family Income Benefit is different, as it pays out a monthly income upon death, instead of a lump sum.
This regular income can then be used by the family to help with household bills and monthly expenditure.
How does it work?
You first need to decide how much monthly income you need to insure for (the monthly benefit), as this is the amount that will be paid out on death.
A good starting point could be to look at your monthly income.
As an example, a £40,000 annual salary would generate a net pay of approximately £2500 per month.
So to fully cover this, your FIB monthly benefit would need to be £2500.
Then you need to decide how long the policy should last for (the term), as it can only run for a fixed number of years.
There’s a few different ways to look at this:
- Until your retirement age
- Until your children are 18/21
- When your mortgage ends
The exact term will be whatever’s best for you.
How the monthly income is paid
This is the part of the policy that might not be so obvious.
The monthly benefit amount (£2500) is paid from the date of death, until the end of the policy term.
For example: You take out a policy for £2500 per month over twenty years. If you die in year five, the policy will pay £2500 a month to your family for the remaining fifteen years. (Not the original twenty years).
Who can apply for this policy?
The name Family Income Benefit seems to imply that you have to have a family to apply for an FIB policy.
This is not the case.
The name just helps the insurance companies with their advertising.
In fact, anyone can take out a Family Income Benefit policy.
Can I buy a policy as a single parent?
Yes.
Can I buy a policy if I’m divorced?
Yes.
Can I buy a policy if I don’t have children?
Yes.
How much does it cost?
Family income benefit is one of the most affordable types of life assurance policy.
The main reason is that the total amount of insurance that the policy pays out actually decreases from the start of the policy.
So there’s less chance that the insurer has to pay out the maximum sum assured, and even if they do start making payments, these are paid monthly.
By comparison, a level term insurance policy will pay the total sum assured in one go, whether you die in the first year, or the last year.
The actual cost of a policy will depend on; the amount of cover, the policy term, your age, your health.
FIXED PREMIUMS
Policies generally come with fixed, or guaranteed, premiums. So you know exactly what the cost will be each month. This is a useful feature of term assurance plans.
Who is Family Income Benefit suitable for?
One of the main advantages of an FIB policy is its simplicity.
It pays out a fixed monthly income, for a fixed period of time.
Other term assurance policies pay out a cash lump sum upfront. To make this last, it normally needs to be invested and then regularly reviewed. The income generated will not be guaranteed and will be subject to income tax.
The best type of life cover to protect a mortgage would be one that pays out a lump sum, so the mortgage could be repaid. An FIB policy could be used to cover the rent on a property that you live in.
It’s a simple policy, without lots of frills. But it can help by paying a monthly income, making it easier for your family to settle bills and manage finances at a difficult time.
Some possible uses
Family with children
If one of the parents dies, an FIB policy can help to protect their lifestyle by paying for childcare and monthly household bills. The income can be set up to last until the children are 18, 21, 25.
Single parent
FIB can help to secure the children’s financial future by providing guardians with a regular and predicable monthly income.
Full time carer
The cover could be suitable for someone who is now a full time carer for their partner. The policy will provide peace of mind that a monthly income can be used to pay for ongoing private care, should the carer die first.
University fees
The cost of higher education involves the tuition fees, accommodation and living expenses. An FIB policy can be set up to provide the exact level of cover needed, so that an undergraduate or postgraduate degree can be funded.
Can you get a joint policy?
Yes, FIB policies can be set up on an individual or joint basis.
As with other types of life insurance, the monthly benefit under a joint policy will be payable to the surviving policyholder.
The policy can only pay out once though.
This is known as ‘Joint life first death‘. So when the first policyholder dies, the cover for the remaining policyholder will stop.
To avoid this you would need each person to take out their own FIB policy. This would be more expensive but it does allow each policy to be set up with the correct level of insurance.
How is FIB different to term life insurance?
When most people think of life insurance, it is a policy that pays out a cash lump sum, the traditional level term insurance.
Family Income Benefit is just as useful, but not as well known.
Let’s see how they compare:
Family Income Benefit
- Fixed monthly premium
- Fixed policy term
- Level (monthly) sum assured
- No cash value
- Used for family protection
- Benefit paid as a monthly income
Level Life Insurance
- Fixed monthly premium
- Fixed policy term
- Level sum assured
- No cash value
- Used for family or mortgage protection
- Benefit paid as a cash lump sum
There are two main differences:
With a life insurance policy the death benefit is paid out as one lump sum. Whereas the FIB policy pays out a smaller amount every month as an income.
A level policy pays out the same total amount of money at the start of the policy and towards the end. Whereas the overall monetary benefit for an FIB decreases as the term reduces. Because of this, the FIB premiums will be cheaper.
Let’s try and explain this further with a quick example.
FAMILY INCOME BENEFIT
Death benefit: £2500 per month
Term: 10 years
Maximum sum assured: £300,000
(£2500 x 12 months x 10 years)
If death occurs after 6 years how much is paid out?
£120,000
£2500 x 12 months x remaining 4 years
LEVEL LIFE INSURANCE
Death benefit: £300,000
Term: 10 years
Maximum sum assured: £300,000
(£300,000 x 1)
If death occurs after 6 years how much is paid out?
£300,000
£300,000 x 1
Can it be used to protect a mortgage?
In theory yes, but it does not provide the correct type of cover.
A Family Income Benefit policy will only payout a fixed monthly income, for the remaining term of the plan.
While this income will relieve some of the family financial pressures, it’s main purpose is to replace a lost income.
Also, the FIB payments will not change due to future interest rate rises.
Most financial experts would recommend taking out cover so that the mortgage can be paid off in full.
The most suitable policies to protect a mortgage would be a decreasing mortgage life insurance or a level term insurance.
How does mortgage life insurance work?
Mortgage life insurance is used to pay off your mortgage if you die. So your loved ones can keep their home and won’t be left with mortgage repayments they can’t afford. In this guide we walk you through how mortgage life insurance works, including the different levels of cover, how long a policy lasts and how to apply.
No. Although the benefit is paid monthly it is not treated as personal income and you do not have to pay tax on it.
A basic FIB policy will not automatically provide cover for critical illnesses. However, most insurance companies do offer this as an option.
Family Income Benefit policies are cheaper than level cover policies. This is because an FIB is a type of decreasing term insurance, where the maximum sum assured reduces each year.
FIB and term assurance plans have a fixed term. When the term ends, the policy and all associated cover, will stop. It will not have a cash value.
Most insurers do now include terminal illness insurance as a standard feature of FIB policies. However, if this is important to you, you should check the policy cover before making an application.
Yes, in line with other types of life assurance, an FIB policy can be written into trust.
Ordinarily, the monthly benefit payments do not increase each year. This is one disadvantage of FIB payments, as inflation will slowly erode the buying power as the years pass. However, some policies do have an indexation option, which will require a higher monthly premium.
Also in this section
Insurance
Life Insurance
Property Insurance
Critical Illness
Mortgage Life Insurance
Family Life Insurance
This post first appeared on Respect Mortgages - Be In The Know, please read the originial post: here
