ProtectionMay 5 2022

What is the place of family income benefit?

Supported by
Scottish Widows
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Supported by
Scottish Widows
What is the place of family income benefit?
Photo: Kamaji Ogino via Pexels

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?

Family income benefit is the best-value family income replacement available.Alan Lakey

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.

It is a valuable part of family protection.Kevin Paterson

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. 

So what other options are there?

Family income benefit

According to LV's Wealth and Wellbeing Monitor in the first quarter of 2022, more UK adults are finding their purse-strings tightened.

The study found: 

  • 33 per cent of UK adults are worried by rising prices of everyday items – up from 27 per cent in September 2021.
  • People over 55 are the most likely of all age groups to be worried, with 36 per cent voicing concern about the rising prices of day-to-day items.
  • Women (40 per cent) are more anxious about rising prices than men (26 per cent).

With the pressure on households, an alternative to standard life insurance is family income benefit, which might particularly benefit households with young children.

According to Mike Farrell, protection sales director at LV, research by the insurer has found the cost of raising a child to 18-years-old is £75,436 for a couple but rises to £102,627 for a single parent.

"It is a valuable part of family protection", says Kevin Paterson, managing director of Enduralife. "Because it is income-based, the cost is usually a lot cheaper than term insurance."

In essence, family income benefit is a simple life insurance plan which, according to Setul Mehta, head of business development and adviser services at The Openwork Partnership, is "an undersold but very useful benefit for households".

The aim of the benefit is to pay out a regular, tax-free monthly income rather than a lump-sum, until the end of the term or on death or diagnosis of a terminal illness. 

The policyholder will pay a regular premium (usually monthly although some are paid out annually), and cover will remain in place for a specified length of time. 

"Family income benefit is flexible and works out cheaper than term insurance, as clients could take out a plan for each child if they wanted to adjust the policy term end dates," Farrell adds. 

Lump sum vs regular benefit?

Mehta says: "Its greatest use is to pay off those regular, everyday bills, such as gas, electricity, food, holidays, school clubs, school fees, the mortgage or rent, cost of care or even divorce maintenance payments.

"It can often be positioned as 'if one of you dies, would you prefer a lump sum to be paid at once and you will have to manage the use of it yourself, or would you prefer something that comes into your bank account each month, without you having to think about anything'."

Lump-sum payments can give a grieving family challenges in budgeting.Sean Dunlop

While some families might prefer the lump sum – to pay off a large outstanding debt, for example – others might prefer the routine of a monthly payout.

For example, as Alan Richardson, protection specialist at LifeSearch points out, sometimes a lump-sum insurance payout is made to a teenager, which poses questions as to how money-savvy they might be.

Sean Dunlop, protection proposition manager for Scottish Widows, explains: "Family protection rarely requires a significant lump sum to cope with the loss of a key earner.

"Lump-sum payments can give a grieving family challenges in budgeting, while receiving the benefits monthly removes the impulse to blow the funds on unnecessary items, and ensures the household running expenditures can continue to be paid, which is what the policy was set up to cover."

AIG Life says family income benefit can be useful in different scenarios, including:

  1. Family with young children: A family income benefit policy could be particularly important to a family with young children. If one of the parents is diagnosed with a terminal illness or dies, it may help to protect and maintain the family’s lifestyle by paying for things such as childcare and utility bills. It can ease the financial pressure on remaining family members should the worst happen and allow them to concentrate on supporting each other.
  2. Single parents: If a single parent were to die or be diagnosed with a terminal illness, family income benefit can help secure the child’s or children’s financial future by providing their new guardian with a regular monthly income. This may help cover their day-to-day expenses such as food, clothes and school supplies.
  3. Full time carer: Family income benefit may also suit someone who has become their loved one’s full time carer. Having this in place means that if your client is no longer around, there is a monthly income available to pay for things such as private home care visits or to help towards paying the utility bills.

Moreover, there can be some flexibility over the payout, as Paterson explains: "Most providers will include living benefits, either as standard or as an option.

"This allows the insured to access some of the cover before death on the diagnosis of terminal illness and, in some cases, on the diagnosis of a specific critical illness or the need to pay for chronic care."

Additional services

According to Alan Lakey, founder of CI Expert and adviser for Highclere Financial Services: "Family income benefit is the best-value family income replacement available.

"The cost is around 50 per cent less than a level term plan."

While family income benefit can be positioned as a slightly cheaper alternative to term or whole-of-life insurance, it still comes with a host of added-value benefits wrapped up into the plan. 

For example, most family income benefit comes with services such as remote GP services for the family, access to personal nurse advisers, mental health and wellbeing support and bereavement support for children and adults.

Clients could take out a plan for each child if they wanted to adjust the policy term end dates.Mike Farrell

As Mehta explains: "A policy is no longer just about the day of the claim: it's about everyday use to give clients that moment of internal comfort when they need it most."

Dunlop adds: "The days of insurance policies simply being a letter that is put into a drawer, with the hope of never having to take it out again, are gone."

Of course, before starting any conversation about family income benefit or other forms of life insurance, it is always worth checking the death-in-service benefits a client might have from their employer.

In some cases this could be a high multiple of their salary, and if they are secure in their employment, it might not be necessary at this stage to take out standard life insurance.

They may also be eligible for up to 12 months' sick pay from their employer, which is also worth taking into consideration and may help in any decisions they make about the sort of cover they need and how much it will cost. 

simoney.kyriakou@ft.com