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Life Insurance vs Family Income Benefit

Life Insurance vs Family Income Benefit

As a parent, it can be daunting to think of a world where you are no longer around to look after your children. That is why if you have dependents, taking out sufficient life insurance is essential.

Unfortunately, only half of UK parents have life insurance cover. This means that if anything were to happen to the other half, their partner and children would be left without financial stability.

Even as a stay-at-home parent, your death could leave your loved ones with a financial burden. Your absence could mean your significant other has to reduce their working hours to look after the children or pay expensive childcare costs.

To ensure future financial security, the best course of action is to secure adequate life cover. For young families, this generally comes in the form of traditional term-based life insurance.

Life insurance comes in 2 main forms, decreasing term and level term

Decreasing term - the cover amount reduces over time, usually in line with a repayment mortgage balance
Level term - the cover amount remains fixed throughout the policy. So regardless of when you pass, as long as it is within the term, the payout is the same

However, there is also the option of the lesser-known, Family income benefit (FIB)

Family income benefit (FIB) is a type of life insurance, but unlike traditional life insurance which provides a one-off lump sum, it instead provides a monthly, tax-free income throughout the term.

With both options, you state the payout amount you desire and how long you want to be covered. Term-based cover involves choosing a lump sum payout amount, whereas family income benefit requires a monthly sum to be determined.

If you die before the end of your term-based life insurance, your loved ones will receive a one-off lump sum, but if you don't it will expire.

With FIB, if you die during the term, your loved ones will receive a monthly income for the remainder of the policy term. Again if you don't die during the policy, it expires and no payments are made.

Which policy should I choose?

So now the differences are understood, let's look at why you might choose one over the other.

Family income benefit causes minimal disruption to your loved one's lifestyle, as it can mimic the wages that you would otherwise have been bringing in.

A large lump sum from life insurance, however, could become part of your estate if the policy is not written in trust. This means that it may become subject to 40% inheritance tax!

Investment of the lump sum is also likely to bring with it difficult and often costly decisions. Some of these decisions may involve paying tax or professional fees.

On the flip side, upon your death, there are likely to be a lot of costly outgoings, such as funeral costs (average cost £4,078) and legal fees.

A one-off lump sum means that this money is readily available and the outgoings can be covered with minimal stress. You could also clear your mortgage with the proceeds.

Obviously, FIB would not be able to cover such expenses.

Not necessarily a choice of one or the other

This is where the two options could work hand and hand. There is no upper limit on the number of policies you can have. Therefore, it is possible, budget permitting, to take out both FIB and life insurance simultaneously.

For example, you may have family income benefit to provide a regular income to cover family living costs. Then you may have term life insurance to cover your mortgage and funeral expenses.

So before you can make a decision as to which type of life insurance is best for you, it is important to consider your budget and what it is you want to protect. Then you can determine whether a lump sum or ongoing payments are best for you.

Lastly, in order to secure the right policy, at the best price, it is important to compare quotes - as prices can vary wildly!

You can either do this yourself online or use the services of an FCA registered life insurance broker.

In summary:

FIB

  • Provides a regular monthly income

  • Premiums very affordable

  • Could help with long-term family budgeting

  • Avoid inheritance tax & complicated investment decisions

  • Joint policy available (you and partner)

  • Cover only lasts as long as the policy term

  • Can include additional critical illness cover

  • No cash-in value

Life insurance

  • Provides a cash lump sum pay out

  • Option of level or decreasing term cover

  • Could clear the mortgage, fund funeral expenses or provide an inheritance

  • Joint policy available (you and partner)

  • Liable to inheritance tax

  • Investing/budgeting a large lump sum could be problematic

  • Cover only lasts as long as the policy term

  • Can include additional critical illness cover

  • No cash-in value

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