How to choose between income vs lump sum life insurance
5 min read
Should the worst happen, would your family be better off with a regular income or one big chunk of money?
If you want to make sure your loved ones get financial support when you pass away, you can choose between different types of life insurance policies. You can set the cover to last as long as the money might be needed, for example, until your children have left education, or you had planned to retire.
Usually with life insurance, your family receives a tax-free lump sum if you die during the policy, to spend as they wish.
However, you can also opt for a kind of life insurance where they’d get a tax-free monthly income instead.
There are pros and cons to both alternatives, so it makes sense to consider which option might work best for you and your family.
Monthly income vs lump sum life insurance over
The lump sum from traditional life cover may be more difficult for your loved ones to manage, particularly when grieving. Your family will have to make lots of decisions about budgeting, if the money needs to stretch over many years. They may also need to tackle investing in stocks and shares.
In contrast, the regular income from family income benefit is similar to a monthly salary, and the familiarity may make coping less stressful.
Paying monthly bills vs clearing big balances
The monthly income from family income benefit is great for covering everyday expenses and ongoing costs, such as household bills, childcare costs and maintenance payments.
However, while regular income might cover mortgage bills each month, it won’t be enough to clear a mortgage completely.
That’s where the lump sum from traditional life cover could help, in removing mortgage worries altogether, or paying off debts.
Known amount vs varying total
Typically, with life cover, your family receive the same lump sum if you die during the policy, whether that’s at the beginning, middle, or end.
For example, if you chose to insure your life for £250,000 for the next 25 years, then your family would receive the same £250,000 if you died at any point during that time.
You might opt for a policy that would replace your salary of £2,000 a month during the next 25 years.
If you die during the first year of the policy, your family would receive £2,000 a month every month for the remaining 24 years.
However, if you died later on, say a year before the policy ended, your family would only receive the £2,000 a month for a single year.
With both types of cover, your family wouldn’t get anything if you die after the policy finishes.
Cost of premiums
Family income benefit, which some insurers offer through a financial adviser, is typically less expensive than life insurance which pays out a lump sum. The premiums can be lower because the longer you live, the less the insurance company might need to pay out. The insurance company also faces paying out smaller amounts over a longer period, rather than one large lump sum.
The premiums for family income benefit can therefore be more affordable, and easier to fit into the family budget.
Faith Archer is a freelance personal finance journalist and money blogger at Much More With Less. Previously Deputy Personal Finance Editor at The Daily Telegraph. She has also written for publications including The Sunday Times, The Financial Times, Mirror Online and the Money Advice Service.
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