Family income benefit is a type of life insurance that pays a regular monthly or annual income to your dependants if you die, rather than a single lump sum. It is one of the most practical forms of protection available to families in the UK, yet it remains far less well known than standard term life insurance.
This article explains how family income benefit works, who it is suited to, how it compares to a lump sum policy, and what to consider when choosing cover.
How Family Income Benefit Works
When you take out a family income benefit policy, you choose a policy term and a monthly benefit amount. If you die at any point during the policy term, the insurer pays that monthly amount to your nominated beneficiaries for the remainder of the term.
For example, if you take out a 25-year policy paying £2,500 per month and die in year 10, your family receives £2,500 every month for the remaining 15 years of the term. If you die in year 24, they receive payments for just one year.
This is the key distinction from a standard lump sum policy: the total payout depends on when during the term you die. The earlier you die, the more your family receives in total. The later you die, the less they receive.
Most policies pay income free of income tax, as the payments are treated as the proceeds of a life insurance policy rather than as employment income.
Family Income Benefit vs Lump Sum Life Insurance
Both products protect your family financially if you die, but they do so in different ways:
- Lump sum life insurance: pays a fixed amount regardless of when during the term you die. Your family receives the full sum assured and decides how to manage it.
- Family income benefit: pays a regular income for the remainder of the policy term. The total payout reduces over time, but the monthly amount stays the same.
Family income benefit typically has lower premiums than an equivalent level term policy because the potential total payout decreases the longer the policy runs. It is also arguably better suited to families who want to replicate a regular salary, rather than managing a large capital sum during an already difficult time.
Who Family Income Benefit Is Best Suited To
Family income benefit is particularly well suited to:
- Families with young children, where the dependency period is long and a regular income is more useful than a lump sum
- Single-income households where the surviving partner would need to replace lost earnings month by month
- Those who are concerned a lump sum might be mismanaged or eroded quickly
- Individuals looking for lower-cost protection who are willing to accept that the total benefit reduces over time
It is less well suited to those with a specific liability to clear on death, such as an interest-only mortgage where a lump sum is needed.
Premiums and Policy Options
Premiums for family income benefit are calculated on similar factors to standard life insurance: age, health, smoking status, occupation, the monthly benefit chosen, and the length of the policy term. Because the overall risk exposure to the insurer decreases as the term progresses, premiums are often lower than for a level term policy with an equivalent starting benefit.
Most policies can be written in trust, which means the payments bypass the deceased's estate and go directly to the beneficiaries without going through probate. This is recommended in most cases.
Some policies also offer an increasing income option, where the monthly benefit rises each year in line with inflation. This costs more but protects the real value of the income over a long policy term.
Frequently Asked Questions
Can family income benefit be written in trust?
Yes. Most UK insurers allow family income benefit policies to be written in trust, which means payments go directly to the beneficiaries and bypass probate. This is generally recommended to ensure payments reach your family as quickly as possible.
Does family income benefit pay out for critical illness?
Standard family income benefit policies pay out on death only. Some insurers offer a combined policy that includes critical illness cover, which would pay the income if you are diagnosed with a specified serious condition. This is a separate feature and will affect the premium.
Is the payout from family income benefit taxable?
Payments from a family income benefit policy are generally not subject to income tax, as they are treated as the proceeds of a life insurance policy. However, if the policy forms part of your estate rather than being held in trust, there may be inheritance tax implications. A regulated adviser can help structure the policy correctly.
What happens if I die near the end of the term?
If you die towards the end of the policy term, your family will only receive payments for the remaining months. This is the main trade-off compared to a lump sum policy, where the full sum assured is paid regardless of timing. For this reason, some people combine family income benefit with a smaller lump sum policy.
Sources
- Association of British Insurers: abi.org.uk
- GOV.UK: Trusts and taxes
- HMRC: Inheritance Tax Manual
About the Author
Tanweer Hussain is the editor at TopQuote.co.uk. He oversees the editorial accuracy of all published content, with a particular focus on the factual detail relevant to UK protection insurance. TopQuote is authorised and regulated by the Financial Conduct Authority.
This article is intended for general information purposes only and does not constitute financial advice. Your individual circumstances will affect which options may be available to you. TopQuote.co.uk is a comparison and information service, not a financial adviser. Always seek independent financial advice from a regulated adviser before making any financial decisions.