Family income benefit explained
Last updated on 09 June 2016
Family income benefit (FIB) is a type of life insurance. Policies run for a set period of time known as the term. If you die within this period, the policy pays out a regular tax-free income until the end of the term. With traditional life insurance a lump sum is paid out on death.
Cover is only for as long as the policy runs. Once the term ends, the cover and any income payments cease.
For example, if you have a 20 year policy and die five years into this, then the policy will pay out a regular income for the remaining 15 years. If you die 16 years into the policy, it will pay out for the remaining four years of the term.
With level-term life insurance a lump sum is usually paid out in the event of death. This lump sum is the same amount regardless of whether death is in the first or last year of the policy (although some policies run indefinitely).
With FIB, the total amount paid out by the policy depends on when you die. If you die in the early years of the policy, the total pay-out will be more than if you die nearer the end of the term of the policy.
This type of insurance is known as decreasing-term life insurance. Because the total pay-out decreases over time, this insurance is cheaper than an equivalent single lump-sum life insurance policy which runs for the same period.
FIB is a cheap and easy way to provide your family with an income rather than a lump sum if you die. If you have a young family, you might want cover to run until your children are grown up. This income could be used to meet everyday expenses or to pay for specific on-going expenses such as school or university fees.
If it's to provide your family with an everyday income, work out how much money they're likely to need each month and base it on this. If the cover is for the main income earner in your household, their income may need to be replaced. If it's the main carer being covered, estimate how much you might need to pay someone to do everything they do.
Don't forget that prices rise over time so you'll need to factor this in when deciding on the amount of income needed. You may also have other life insurance which will pay out in the event of a death.
Premiums are based on the amount of cover and how long you want it for, your health, lifestyle (such as whether you smoke or not) and your age. You can opt for a level income or pay more for an income that rises by a set amount each year. Waiver of premium cover is also usually available. This ensures your premiums are met if you're unable to pay them yourself because you fall ill and are unable to work.
Some policies now offer a critical illness option which means the policy would pay out if the policyholder developed a serious illness such as cancer. However, all extras like this will add to the cost. so find out the cost of basic cover first.
Policies are often bought on a joint basis which means the income payments are made as soon as one partner dies. But it may be only slightly more expensive to own two individual policies. This is potentially better value as they would offer double the pay-out if both parties died during the policy term.
Should you buy it?
This type of policy shouldn’t be taken to cover your mortgage or other debts – insurance that pays out a lump sum is usually more appropriate for that. However, FIB is worth considering if, in addition to paying off your debts, you want to make sure your family receives an income for a given time should you or your partner die. It’s easy to decide how much cover you might need and for how long, and is usually quite inexpensive, especially if you take it out while you are still relatively young.
FIB is not widely sold, so you may need to go through a financial adviser specialising in protection insurance. You can find an adviser at unbiased.co.uk.