FROM the devastating Covid-19 pandemic to the more recent cost-of-living crisis, there’s no denying that the last few years have been extremely challenging for many both here in Aberdeen and throughout the country.
According to the Office of National Statistics, around 1/3 of UK workers saw their household income drop during 2020.
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Fast forward to 2022 and Scots are facing increases to mortgages and rent, as well as soaring energy bills – leaving many calculating how they will afford to cover these costs.
While how you’ll cover these costs in the present day may be at the forefront of your mind, it’s also important to consider how your loved ones would cover these costs if you were no longer around.
You will most probably have heard of life insurance, which pays out a cash lump sum to your loved ones should you pass away during the policy term. But have you heard of family income benefit?
Family income benefit is a lesser-known alternative to life insurance. The policy will pay out to your loved ones after your passing; however, it will pay out tax-free monthly instalments – much like an income instead of a single cash lump sum.
By having a regular income paid out, your family won’t have to make unexpected changes to their lifestyle (at what’s already a changing time).
It’s an ideal option for those with young families, as premiums are very affordable, and the payments can help to protect family living costs. What’s more, you do not have the burden of managing one large lump sum which may be subject to tax and investment decisions.
The UK’s leading life insurance broker Reassured share their top 5 reasons for choosing family income benefit to protect your loved ones.
But first, how does family income benefit work?
As with traditional life cover, you’ll choose how much you’d like to be paid out (this could be up to £5,000 per month) and how long you’d like to be covered for (this could be up to 40 years).
It is worth factoring into your calculations any group life insurance or death in service benefit that you may be entitled to through your employer.
Throughout the policy lifetime, you’ll need to pay a monthly premium to keep your cover valid. The price that you pay will be determined by factors such as your age, medical history, lifestyle, smoking status and cover amount.
If you pass away during the policy term, your loved ones can make a claim and start to receive monthly payments. They’ll receive payments for the remainder of the policy term. For example, if your policy term is 30 years, and you pass away 15 years into the policy, payments will be made for the remaining 15 years.
The payments received can help your loved ones keep up with their current and future cost of living by covering expenses such as:
- Mortgage or rent payments
- Household bills and utilities
- Childcare
- Transportation
- Day-to-day living costs
- Debt/loan payments
- Higher education costs
5 reasons you should choose family income benefit to protect your loved ones:
- Ideal for long-term budgeting
Family income benefit will pay out in monthly tax-free payments (like an income) for the remainder of the policy term. This means your loved ones will know exactly what they’re receiving and how long for.
While traditional life insurance can also provide your loved ones with financial aid when you’re no longer around, it will be in the form of a large lump sum.
During this difficult time, there’s already so many other factors to organise (such as a funeral), so it can be hard for grieving loved ones to work out a new budget on top of this.
The monthly payments provided by family income benefit can allow loved ones to continue with their usual family spending, without the added stress of having to budget a large sum of money.
- Payments are tax-free
Family income benefit can provide your loved ones with a tax-free income.
With a traditional life insurance policy, the lump sum payment will form part of your estate when you pass away (unless the policy is written in trust).
40% inheritance tax is charged on any amount that takes an estate over the threshold of £325,000. Your estate is made up of your savings, property and possessions, so it’s not hard for it to exceed this amount.
With family income benefit, as payments are made monthly, the funds won’t form part of your estate after your passing – meaning they’re not subject to inheritance tax.
The monthly payments received by your loved ones are also not subject to income tax.
- Premiums are affordable
Family income benefit is one of the most affordable policy types available.
As cover is term-based (lasts for a specified period) and payments are made monthly, your risk to the insurer is much lower than with other types of cover – meaning premiums are often cheap.
However, it’s important to be aware that the exact price you pay will depend on your personal circumstances and the policy terms you choose.
Details you’ll need to provide in order for insurers to calculate your premium includes:
- Age
- Smoking status
- Medical history
- Family medical history
- Occupation
- Lifestyle
- Policy term (length of cover)
- Sum assured (pay out amount)
- Terminal illness is included as standard
Terminal illness cover is a policy extra that’s included with family income benefit (and other term-based policies) at no extra cost.
It can allow you to make an early claim on your policy if you’re suddenly diagnosed with a life-threatening illness that gives you 12 months or less to live.
This could be an extremely distressing time for you and your loved ones, both emotionally and financially.
The payments received could help to cover the cost of any private medical treatment or make your remaining time more comfortable.
After your passing, your loved ones will continue to receive monthly payments, which can help them to continue with their current lifestyle.
- You don’t have to choose between one or the other
If you have the available budget, it’s possible to take out both a family income benefit and life insurance policy simultaneously.
Life insurance is beneficial for protecting large costs such as paying off your mortgage, covering rising funeral costs (the average cost of a funeral in Scotland is £3,873 and the total cost of dying £8,864) and leaving an inheritance – which monthly family income benefit payments might not be able to cover.
Therefore, you could choose to take out a term life insurance policy to help protect the full cost of your mortgage (so loved ones don’t have to worry about making monthly payments) and a family income benefit policy to protect your family’s daily living costs. Please note, this would mean paying two separate monthly premiums.
Each family has varied needs and a different budget, so talking to an expert can help you to find the best option for you.
Reassured, can help you compare both family income benefit and life insurance quotes free of charge – allowing to you to find the most suitable option to meet your needs. Alternatively, if you know the policy type you require you could use a reputable comparison website to source the best premium price.
Whichever option you choose, having the necessary financial protection in place to provision for an uncertain future is generally a very good idea, especially if you have young children who rely on you.
