Your IndustryMay 14 2015

How family income benefit works

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Andrew Jenkinson, director at Drewberry, says the monthly income offered by family income benefit can be easier for beneficiaries to manage rather than a lump sum.

However, also like a ‘wage upon retirement’, once the policy term finishes, the income will stop.

If a claim on a £20,000 a year policy is made in the early years of a 20-year term, say in year four, then Emma Thomson, life office relationship director at Lifesearch, points out the family will receive 16 annual payments, totalling £320,000.

If however a claim is made in year 18, then Ms Thomson points out only £40,000 will be paid out. A lump sum policy will pay the same regardless of when a claim is made.

Martin Lockyer, managing partner of Westminster Wealth Management, says he strongly advocates using family income benefit within a client’s financial plan.

He says it allows the adviser to provide a policy that exactly matches any identified income shortfalls, unlike traditional life assurance policies where you often have to provide cover in the hope that it will be invested wisely at an arbitrary rate of return.

Mr Lockyer says: “It has a misleading name but family income benefit is not a state handout, it is a life insurance policy that pays out a regular income rather than a lump sum.

“Like lump sum life insurance it is a good option for people with dependants who want to ensure they are provided for financially if the policyholder were to die within the term of the policy.”

The customer decides how much income would be needed each month and for how long, Jennifer Gilchrist, senior product development manager with Bright Grey, adds. For example, Ms Gilchrist says the cover could be to the date they retire or to the date by which their mortgage is paid off.

In order to protect against the effect of inflation, Ms Gilchrist says the customer can choose to have the income amount increase each year so it keeps track with inflation.

For example, Ms Gilchrist says a husband or wife told by the courts that they must pay maintenance until the children reach the age of 18 may decide to take out life insurance or earlier critical illness cover. In the event of serious illness or death, the maintenance amount will continue to be paid and therefore retain the children’s standard of living.

If the maintenance is £2,000 each month, Ms Gilchrist says the plan would be written as paying out an annual amount of £24,000.

When it comes to needing to access the benefits of the policy, Ms Gilchrist says a claim will be considered in the same way as lump sum payments. Ms Gilchrist says this means that for critical illness cover, the life assured will have to meet one of the critical illness definitions.

As part of the claims process, Ms Gilchrist says the customer will likely be asked if they would prefer to have the income amount commuted to a lump sum. The lump sum amount would be calculated by multiplying the monthly benefit amount by the number of months remaining.

But something to consider is that the amount paid out will be reduced to reflect the fact the customer will be getting all of the monthly payments early, she says.

Pros and cons

In terms of the ups and downs of family income benefit, Alan Lakey, partner in Hertfordshire-based Highclere Financial Services, says a key consideration for cash strapped families is this product is actually the cheapest form of life insurance and is aimed at meeting certain needs.

He says not every situation benefits from a capital sum, so a regular flow of income provides a solution to many situations. The drawback is that towards the end of the policy term the amount of insurance has reduced to a far lesser amount, Mr Lakey says.

Ms Thomson of Lifesearch points out VitalityLife though offers a policy that provides additional cover to alleviate some of these downsides.

It pays an extra £2,000 lump sum towards funeral cover and can also pay an additional amount for the first year to cover bills. It also has an option to pay out a lump sum should the client claim towards the end of the policy.

As an FIB premium is usually cheaper than the lump sum equivalent, Bright Grey’s Ms Gilchrist says for clients with a limited budget, this option may allow them cover they may not have thought they could afford.

Ms Gilchrist says: “Regular monthly income at claim may be more appealing than being faced with a lump sum that they do not know what to do with, for example, do they pay off their outstanding mortgage or invest it to provide an income for the future.

“Also, if a decision is made to take an income initially, it may be possible to get this commuted to a lump sum at a later date if the individual is better placed at that point to make a more informed decision.”

The main benefit of family income benefit is beneficiaries do not have to worry about managing or investing a lump sum of money when someone dies, says Steve Casey, head of marketing and propositions at AIG Life.

He says: “Rather they can simply use the regular payment towards their general living costs, towards specific costs such as school or university fees, or for whatever purpose the insurance was set up for.”

Like term assurance, Mr Casey says family income benefit can also be claimed early should the policyholder be confirmed as being terminally ill and have less than 12 months to live.

One disadvantage to beneficiaries though could be that not all insurance providers inflation-proof the payments for the life of payouts, Mr Casey points out.

Once a claim is agreed, Mr Casey says the amount of money the beneficiary receives may only increase with inflation for a set period of time, for example two years after the first payment is made.

On the flipside, he says this could be an advantage to the person buying the insurance as it helps to manage the cost of FIB.

Mr Casey says: “One of the cons may also be the name ‘family income benefit’.

“It may not be clear to the customer that this is a form of life insurance and they could instead think it is a form of insurance which pays out when someone is too ill to work.”

As with all insurance plans, Ian Barnes, head of product marketing at Legal and General Insurance, warns terms and conditions apply and these plans are not savings or investment products and have no cash value unless a valid claim is made.