With most life insurance policies, the death benefit — the portion of the money that’s paid out to your beneficiaries — is distributed as a tax-free lump sum of money. Your loved ones are then free to do whatever they want with the payout.
A family income life insurance policy treats the death benefit like a monthly income stream instead of a one-time payout. Most people are best suited with a traditional lump-sum payment, but if a one-time payment would be stressful for your loved ones to manage and they’ll need very little financial support in the final years of your policy, then a family income policy might work for you.
Family income insurance lasts for a set term, then the policy expires.
When you pass away, beneficiaries receive the death benefit in increments every month
Monthly benefit payments help beneficiaries who would find a lump sum payout overwhelming.
The death benefit decreases the longer the policy is active, so most people get more value from a standard term life policy.
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How a family income policy works
A family income policy, sometimes called a family income benefit (FIB), is a form of term life insurance policy. The policy is active for a certain number of years (the term) and pays a death benefit if you die during the term or expires if you outlive the policy. FIB benefits are paid monthly.
It’s important to note that more specifically, a family income policy is a type of decreasing term life insurance, meaning the value of the death benefit decreases the longer you live. When you’re buying your policy, you’ll decide the size of the monthly payment and how long it lasts. For example, you might look at how much life insurance you need to support your spouse and children and decide you’d like them to receive $5,000, per month to replace lost income after you die.
In the above example, if you die five years into a 20-year policy, it will pay out $5,000 a month for the next 15 years (a total of $900,000); but if the death occurs 15 years into the policy, the monthly $5,000 will be paid out for only five years ($300,000 total).
Who should get a family income policy
A family income policy is most useful if your loved ones would benefit from having the payout disbursed over a longer period of time.
Benefits of a family income policy
With death benefits easily totaling $1 million or more, it can be difficult to decide how to use that large lump sum while navigating other end-of-life processes and grieving.
A family income policy replicates getting an income from the breadwinner, so it’s more true-to-life and not as jarring to a family that’s already dealing with huge changes. The policy is also structured so that it provides the support your beneficiaries need when they need it. It can be a safety net while your children are still growing, but won’t negatively impact your finances if you pass away later in the term, after you’ve saved for retirement and paid down your debts.
Drawbacks of a family income policy
The biggest downside of a family income policy is that it decreases in value the longer you’re alive. Your beneficiaries receive installments depending on when you pass away, so they’ll get less benefit the longer the policy is active and unused.
Like other types of life insurance, the premiums you pay for family income life insurance are tied to how much coverage you want, your health, your financial situation, and your lifestyle. If you have risky hobbies or chronic health conditions, you’ll still be charged higher premiums, meaning you could pay the same or more than you would for traditional term life coverage and get less value from your policy in return.
A couple in good financial standing might not need a large insurance payout once their children are grown, but a life insurance policy can still cover existing debts or help your partner maintain their lifestyle if you pass away, which a policy with diminishing value can’t support as easily.
Alternatives to a family income policy
If you prefer an insurance policy with a stable coverage amount but think a monthly death benefit distribution could help your beneficiaries, you may have the option to add a family income rider to a more standard policy. The monthly payment from a family income rider is paid in addition to the lump-sum death benefit of your policy. Whether this rider comes at an extra cost varies by insurance provider.
You can also advise your beneficiaries to receive the death benefit as an annuity after you pass away. With this option, the death benefit is used to purchase the annuity, a type of investment vehicle managed by the provider. The death benefit is disbursed to beneficiaries in installments over a term of their choosing (usually 10-20 years or the rest of their lives), like in a family income policy, but your beneficiaries receive the full benefit amount no matter when you die. An annuity may raise some tax and investment considerations.
Is a family income policy worth it?
For most people, a standard term life insurance policy with a lump sum death benefit payout is the best and most straightforward option. A family income policy provides the death benefit in a unique way, but its decreasing value means your beneficiaries may not get as much financial support as they need. It’s better to name beneficiaries you trust to make a levelheaded decision with the insurance payout and make sure they know their options.
Family income policy FAQ:
How does family income life insurance work?
Family income insurance works like term life insurance, except for the death benefit payout. The policy lasts for a set number of years and if you die during that period, the death benefit pays out a set sum every month rather than the traditional lump sum payout.
Who is a family income policy good for?
Because the death benefit value decreases over time, most people should get traditional term life insurance. A family income benefit is best for a beneficiary that would find the lump sum payment overwhelming and who won’t need as much financial support toward the end of the policy term.
What is the difference between a family income policy and a family maintenance policy?
If you pass away, a family income policy pays the death benefit in installments for a set period of time. A family maintenance policy does the same, but also pays a lump sum at the end of the policy term.