Family income benefit is a type of life insurance that pays a regular monthly income to beneficiaries if the policyholder dies during the policy term. It is different from most other life insurance policies, which pay a single lump sum. Instead of a one-off payment, the beneficiaries receive a fixed monthly income for the remainder of the policy term from the date of death.
This article explains what family income benefit life insurance is in the UK, how it differs from standard term life insurance, and the key features to understand when comparing policies. It is general information only and does not constitute financial advice.
How Family Income Benefit Works
When a family income benefit policy is taken out, the policyholder selects a monthly benefit amount and a policy term. If the policyholder dies during the term, the insurer pays the agreed monthly amount to the beneficiaries for the remainder of the term.
For example, if a policy has a 25-year term and the policyholder dies in year 8, the beneficiaries would receive the monthly benefit for the remaining 17 years. If the policyholder dies in year 22, the monthly payments would continue for the remaining 3 years.
If the policyholder survives to the end of the policy term, no payout is made. Like standard term life insurance, family income benefit has no cash value if no claim is made.
How Family Income Benefit Differs from Level Term Life Insurance
The key difference is in the form of the payout. Level term life insurance pays a fixed lump sum at the point of claim. Family income benefit pays a monthly income for the remaining policy term.
The total potential payout under a family income benefit policy reduces over time as the remaining term shortens. This means the insurer's maximum liability at any point is lower than it would be for a level term policy with an equivalent initial sum assured. This is generally reflected in lower premiums for family income benefit compared to level term cover on a like-for-like basis.
Illustrative Cost Comparison
As an illustration, a 35-year-old non-smoking applicant seeking 2,000 pounds per month of family income benefit over a 25-year term might see indicative premiums in the region of 12 to 22 pounds per month, depending on the insurer and health profile. A level term policy providing a lump sum broadly equivalent to the total potential payout would generally carry a higher monthly premium. These figures are illustrative only and are not a quote.
Indexation and Inflation
A fixed monthly benefit will have lower purchasing power in future years due to inflation. Some family income benefit policies offer an indexation option, under which the monthly benefit increases annually in line with a measure such as the Consumer Price Index. This option increases the premium but aims to maintain the real value of the benefit over the policy term.
Tax Treatment
If a family income benefit policy is taken out personally, rather than through an employer, the monthly benefit payments are generally free of income tax for the beneficiaries. If the policy is written in an appropriate trust, the payments can also fall outside the estate for inheritance tax purposes. Tax treatment depends on individual circumstances and the applicable law, and professional advice should be sought.
Combining Family Income Benefit with Other Cover
Some people arrange family income benefit alongside a separate policy that provides a lump sum, such as a decreasing term policy to cover a mortgage. This combination provides both a capital sum to clear a specific debt and a regular income to cover ongoing living costs. The appropriateness of any combination of policies depends on individual circumstances.
Frequently Asked Questions
Q: Can the monthly benefit amount be changed after the policy is set up?
The policy terms will set out what changes, if any, can be made once the policy is in force. In many cases, the benefit amount is fixed at the point of application. If a different benefit level is needed, a new policy may need to be taken out. Any new application will be underwritten based on age and health at the time of application.
Q: What happens if the policyholder stops paying premiums?
Most term life insurance policies, including family income benefit, will lapse if premiums are not paid, meaning the cover ceases. There is generally no cash value to recover from a lapsed term policy. The specific terms on missed premium payments will be set out in the policy documentation.
Tanweer Hussain is the editor at TopQuote, an independent life insurance broker and appointed representative of The Openwork Partnership with over 20 years of experience. He oversees the accuracy of all published content, including the factual and regulatory detail that matters most on claims-related topics. All content on this page has been reviewed for FCA compliance.