24 Dec 2014
Karen Anderson, Independent Mortgage Adviser, looks at Family Income Benefits.
FIB is where the benefits of a life assurance policy are paid as a monthly income (typically to your family) instead of as a one-off lump-sum.
This is the lowest cost way to buy life insurance, because the potential payout decreases the further through the policy you get.
Assuming you are 30 years old and you want to buy a policy designed to payout income of £36,000 a year or £3,000 a month until your new baby finishes university at the age of 21, you would have to pay about £15.44 a month. If you die at the end of the second year, your family will receive 19 x £36,000 in payments, or £684,000. But if you survive until your child is 18, you family will only get three £36,000 payments, or £108,000.
This might sound a bit unfair, but remember the resulting lower premium cost could make the difference between you being able to afford the insurance or not. And the £108,000 your family would receive if you die at the end of the 18th year of the policy should still be enough to enable your household to function normally and for your child to get through college.
You are also likely to be able to achieve a much higher annual income through this type of policy than level term insurance if you invested the proceeds of a payout to produce income. Assuming you invested the payout in an annuity at today's rates to produce income, you would need about £550,000 to achieve a £36,000 annual income. A policy to produce this sum would cost a 30-year-old man about £28 a month over a 25 year term, based on current premium levels.
A family income benefit policy can be a good compromise for a household living on a tight budget with specific spending needs.
In the event of a claim on your policy, some insurers will offer to ‘commute’ the money to a one off lump-sum. They do this as it saves them money on administration costs. It is worth bearing in mind however that the amount offered is generally less than would have been paid out if received monthly. Index Linking can be included in your family income benefit. This means that each year your provider will automatically increase the sums insured under your policy to reflect changes with inflation offering you peace of mind.
Waiver of premiums is a feature which can be added to your plan which means if you are off work due to illness or injury for more than 6 months, your premiums can be waived, although you keep the policy, until you go back to work. What you do for a living and your health, will be deciding factors as to whether there are any exclusions to this option. You are able to set up critical illness cover plans in this way and they won’t stop the payments if you get better.
A family income benefit policy with ‘Guaranteed Premiums‘means that the amount you pay every month is guaranteed to stay the same.
If you choose a family income benefit with ‘Reviewable Premiums’ the monthly premium is fixed, typically for the first 5 years only. At this point, it will then be reviewed by the assurance provider. They do this based on their claims history over that period and could increase, decrease, or leave your premium the same. After the first review, some providers will fix the premium for another 5 years; others will review it every year thereafter.
To find out more about FIB, speak to one of our advisers by clicking here.