The Features and Benefits of a Family Income Benefit Policy
Family income benefit is most likely to be tested in the CII R05 exam. You might also find that it could come up in CF1, R01, R06, R04, or AF5.
Features
A family income benefit (FIB) policy pays out a tax-free income to replace the earnings that the life insured would have provided for their family had they lived.
The sum insured is paid out as a regular income, typically monthly, from the death of the life insured until the expiry date of the policy.
For example, Carys is a single parent with two young children. After an analysis of her income and expenditure, her financial adviser recommends that she takes out a FIB policy with a monthly benefit of £2,000. She suggests a term of 21 years, as this ties in with when Carys’s youngest child is likely to finish university.
If Carys were to die at the very beginning of the second year of the policy, it would pay out £2,000 a month for 20 years. This would be a total of £480,000, i.e. £2,000 x 12 months x 20 years.
By contrast, if she were to die at the very beginning of the final year of the policy, it would pay out just £24,000, i.e. £2,000 x 12 months x 1 year.
To ensure that the sum insured maintains its value for the 21 years, the adviser recommends index-linking, as well as a waiver of premium so that Carys’s premiums will continue to be paid and the cover can remain in place in the event that she is unable to work due to an illness lasting longer than six months.
Benefits
As we’ve said, a FIB policy pays out a regular income rather than a lump sum.
This can be especially useful where there is some concern about how well the intended recipient would handle receiving a large lump sum. With a level-term policy, the payout can be substantial and not many people are used to dealing with large lump sums, something that might be even harder to handle following a family bereavement. If the money is crucial for maintaining the standard of living of the surviving family and there are concerns that the recipient will spend it on frivolous things, a FIB may be a suitable solution.
Also, as a FIB policy is a type of decreasing term insurance it will be cheaper than the equivalent sum insured for level-term insurance and can therefore be helpful where affordability of premiums is an issue for the policyholder. Like other decreasing term assurances, although the sum insured decreases over the term, the premiums remain constant (except for any index-linked related increases).
A Word of Warning
A FIB policy usually entitles the beneficiary to commute the income benefit into a lump sum if they so wish. The total lump sum payable will then be slightly less than the total income benefit to reflect the fact it is paid out in one instalment.
Given the reason for taking out the FIB in the first place could have been to avoid the receipt of a large lump sum, one way to prevent the beneficiary from commuting the policy would be to have it written under trust. The trustees are then responsible for claiming the benefit and can decide how it should be paid out in the best interests of the beneficiary(ies).
Writing the policy under trust also prevents it from falling into the policyholder’s estate for IHT purposes, potentially saving IHT at 40% and, where the beneficiaries are under 18, means that they already have someone who can act on their behalf to claim the policy proceeds.
Grab the resources you need!
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Alternatively, you can download the taster for AF5, CF1, R01, R04, or R06 if you are revising for any of those exams.