You no doubt want to protect your loved ones against life’s twists and turns. For many families, that includes shielding their finances from the worst-case scenario – the loss of a family member.
While suitable financial protection could provide a reassuring safety net, the options can be daunting. As a result, it’s not uncommon for people to put off organising cover until it’s too late or take out insufficient cover for their needs.
Life insurance and family income benefit can both offer some financial security in the event that you or your partner dies. But with each offering different types of protection, identifying the right one for your family can be confusing.
To help you understand your options, read on to weigh the pros and cons of life insurance and family income benefit, and whether a combined approach could provide the peace of mind you need.
Life insurance usually pays out a lump sum when you die
If you die with life insurance in place, your beneficiaries will usually receive a one-off lump sum payment.
There are two types of life cover to consider:
- Whole of life cover: As the name suggests, these policies offer protection for the rest of your lifetime, provided you keep up with premium payments until your death.
- Fixed-term cover: These plans provide cover for a defined period. If you outlive the policy term, your cover will end.
The value of your lump sum will depend on your level of cover. Generally, higher levels of cover have higher premiums. Premiums are also affected by other factors, including your age and health.
As such, it’s important to weigh how much your loved ones will need when you die against how much you can afford to pay in premiums for the policy’s duration.
If your needs change, you may be able to adjust your level of cover mid-policy. Otherwise, you may need to take out new cover to either supplement or replace your current protection. Before changing your plan, be sure to speak with a financial planner for support in selecting suitable protection for you.
The advantages of life insurance
Life insurance can offer valuable protection for large financial commitments, such as covering your mortgage or other debts, or supporting your children while they’re still financially dependent.
Not only could this improve the financial security of your family, but it may also reduce stress at an already difficult time. A lump sum payment might mean your partner has more options, such as taking time away from work to ensure children are emotionally supported.
The downsides of life insurance
A lump sum payment could be useful if your loved ones need to pay off a large debt. However, it might be difficult to manage if they intend to use it to cover day-to-day expenses over many years. If your partner isn’t comfortable or confident making financial decisions, the payout received from life insurance might not suit their needs.
It’s also important to note that your policy holds no cash value. If you cancel your policy or outlive your fixed term, you won’t be able to recoup the premiums you have paid.
Family income benefit provides regular payments for a defined period
In contrast to standard life insurance policies, family income benefit usually pays out a regular income to your beneficiaries – rather than a lump sum.
If you die or are diagnosed with a terminal illness during your policy term, your family could receive tax-free monthly payments for the remainder of the term. The income they receive depends on the level of cover you choose and is contingent on you keeping up with premiums.
The advantages of family income benefit
By covering their daily living costs, family income benefit can provide valuable financial stability, giving you peace of mind that your loved ones can continue their current standard of living if you pass away during the policy term.
This type of cover can be particularly helpful if you’re worried that your beneficiary would struggle to budget with a large lump sum. For example, if your policy is for a financially dependent child, you might prefer for them to have a regular income rather than a windfall.
The downsides of family income benefit
While family income benefit can help your loved ones maintain their regular lifestyle, it may be less suitable for covering funeral costs or any other short-term large expenses. They also wouldn’t be able to use it to pay off large debts, such as a mortgage, so you will need to consider if the income from family income benefit would be enough to meet these commitments.
As with fixed-term life insurance, family income benefit holds no cash value. If you outlive the policy term, you generally won’t receive any financial benefit from your cover and will not be able to reclaim your premiums.
That said, even if you never claim on your policy, that doesn’t mean you won’t have seen any benefit. Having suitable protection in place can provide invaluable peace of mind, allowing you to rest assured that your loved ones will continue to receive a stable income even after you’ve passed away.
A combined approach may be appropriate
Life insurance and family income benefit can each help create a robust financial safety net to protect your loved ones in the event of your death.
Choosing appropriate cover for your needs isn’t always straightforward. In some cases, a combination of protection may be suitable. As an example, if your family is still repaying a mortgage and relies on your income for maintaining their standard of living, you might consider:
- Life insurance to pay off the rest of your mortgage or other large debts
- Family income benefit to help your family continue paying the bills and enjoying their current lifestyle.
Of course, the above is just an example. The most suitable solution for your family will depend on your needs, circumstances, and priorities. As such, it’s often worth consulting with a financial planner for support in assessing which cover could deliver the financial protection and peace of mind you’re looking for.
Get in touch
For support in identifying appropriate cover to protect your family’s financial future, get in touch.
Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.