What is the place of family income benefit?

This article is part of
Guide to financial resilience and protection

What is the place of family income benefit?
Photo: Kamaji Ogino via Pexels

How do you start to talk to a new client – a young family, perhaps – about what they will do if the main breadwinner dies?

It is not the sort of question people might be expected to ask of newlyweds, or young couples coming to a financial adviser to help them get a foot on the property ladder.

Moreover, while some couples might consider life insurance or income protection on the birth of their first child, perhaps born from an innate need to protect the child against future problems, the options might seem confusing or expensive.

But what would happen if the main breadwinner were to die or become terminally ill?

One option to consider could be life insurance with terminal illness cover bolted on, although this might be expensive and has its drawbacks. 

Another option could be family income benefit, which is a simple form of term life insurance, but sometimes overlooked in favour of standard life insurance.

Terminal illness benefit

Terminal illness benefit is bought usually as a bolt-on when people take out standard term life insurance.

It is paid out on diagnosis of a terminal condition, which allows the policyholder and their family to make financial plans while the policyholder is still alive.

When it comes to paying out, the medical officer needs to be satisfied that the policyholder's death would be within a 12-month period.

If the policyholder makes a successful claim but then lives beyond 12 months, nothing is owed back to the insurer. But it can be hard to make a successful claim because in the field of medicine, as in many walks of life, nothing is absolutely certain.

The difficulty is that any medical practitioner or consultant would have to be 100 per cent sure the patient would be dead within 12 months before they sign the form for the insurer, and many doctors might be unwilling to make that sort of call.

There are also some caveats regarding older term insurance policies. New term life insurance policies do not tend to have 12 to 18-month terminal illness exclusions on their policies but older ones might.

This means if a policyholder were to get a terminal diagnosis within the last 12 to 18 months of their life insurance policy, they might not get a terminal illness benefit payout, in case their death occurs after the term of the policy has ended. 

Therefore it might be worth exploring whole-of-life insurance policies, which add a cash value component that policyholders might be able to use during their lifetime, and the policy provides lifelong protection as long as the monthly payments are met.

The caveat here, though, is whether consumers will be able to keep up with the payments each month.

With the rising cost of living starting to cause real worries for households, families might not be able to pay the monthly premiums, even if there is a short payment holiday allowed.