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.