Save 35% on your life insurance!

This little known form of life insurance can slash your premiums - but is it worth it?

It’s pretty difficult to make life insurance seem sexy. In fact it’s probably near enough impossible. It’s about a bleak a subject as you can get, and policies can be pretty expensive. However, there is a little-known form of the insurance that not only offers decent cover, but is typically 35% cheaper than traditional life insurance policies.

It’s called Family Income Benefit policy.

So how does the policy work? And why is it so much cheaper?

A monthly income

The main difference between a Family Income Benefit policy and more traditional forms of life insurance is the way the payout works.

With most life insurance policies, if you die within the policy term, your family is handed a tax-free lump sum. The size of that lump sum depends on how much cover you have obviously, but the fact is they are handed thousands of pounds and then it’s up to them to work out how and where the money should be spent or invested.

It’s a little different with a Family Income Benefit policy, as the tax-free money is instead paid in monthly instalments for a set period, like a salary effectively.

Keeping things simple

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The positive aspect of this is that the family you leave behind then don’t have to worry about how to invest a six-figure payout in order to ensure it lasts as long as possible.

As supporters of Family Income Benefit like to point out, it costs money to invest such a lump sum, in terms of fees and commissions to IFAs and the like, and should you even manage to get a modest return on that cash, you’ll only have to pay tax on it.

Instead, your family simply get a payout every month, completely tax-free, until the end of the term you signed up for.

35% cheaper!

So life is made a little simpler for your family once you’ve gone, but there’s also a cost benefit involved.

Family Income Benefit policies on average are around 35% cheaper than normal life insurance policies. That’s a hell of a difference, particularly if you are starting to feel the pinch and have been questioning just how vital certain outgoings are each month.

Decreasing cover

Inevitably, there is a downside to all of this, and it is quite a hefty one.

While the size of each monthly payout remains the same throughout the term of the policy, the total amount that the insurer will pay out decreases over time. 

Imagine you take out a 20-year term policy today that offers a tax-free benefit of £30,000 a year and, in one year's time, your family made a claim, the policy would pay out £2,500 each month for 18 years. But if instead your family had to make a claim in 17 years' time, the policy only pay out £2,500 a month for three years. So the total pay-out will be smaller - £90,000 vs £570,000. That's why Family Income Benefit providers can afford to offer lower premiums than on other types of life insurance, as they are betting most of us will only need to make a claim late in the term of the policy.

The counter to this is that should you claim early on in the term, you may actually end up with a higher payout than if you had gone with a traditional life insurance policy.

Good for families

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Get the peace of mind that comes with buying the right life insurance policy at the right price.

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Advocates of Family Income Benefit point out that if you are in the last few years of the policy, your need for the payout is substantially less than early on, when you may have young children and childcare costs to worry about.

In other words, while a widow with a new-born might really need the whole of the £570,000 cover she’d be entitled to get in monthly payments should her husband die in year one, by the time the child is 17 a payout of £90,000 may be more than sufficient.

Index-linking

Of course, how much £30,000 a year is worth in 2010 may be quite different to how much it will be worth in 2030. As a result, it’s probably a good idea to get your Family Income Benefit policy index-linked, so that the payout increases with inflation.

However, it’s worth remembering that this will lead to higher premiums.

Why I won’t be taking it out

I like these policies, and am glad they exist as they offer a really good option for those people with money worries who still want to ensure their family is at least given some security when they die. The tax aspect is also pretty attractive.

However, it’s not right for everyone, and personally, so long as I could afford it, I would always prefer to go for a more traditional life insurance deal.

My own preference is for level term assurance, which pays out the same amount in a lump sum, no matter when you claim. That way I know that whenever I die, not only will the mortgage be paid off, but my wife and family will be left with a sizeable chunk of cash to do with as they please. And I trust them not to go on a massive bender at my expense once I’ve gone!

Yes it’s more expensive, but I think it is a little simplistic to suggest that just because the children may have reached their teenage years they automatically cost less.

What about University, buying their first car, buying their first home (because you can guarantee the Bank of Mum and Dad will still be a necessity) or helping to pay for their wedding? Just because they will be of an age where they can fend for themselves does not mean I would want them to have to do so.

One good thing about life insurance is that there are a fair few different varieties, so that all needs and budgets are covered. If you’re thinking about taking out a policy I’d recommend adopting our Get the right type of life insurance goal and having a read of Life insurance made easy.

You can also compare a range of life insurance quotes with our quote engine.

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