With most life insurance policies, the proceeds are paid out to your beneficiaries as a tax-free lump sum of money, called the death benefit. In a family income life insurance policy, the payout is distributed as a monthly income stream instead.
For most people it’s better to receive the death benefit in a traditional lump-sum payment. However, 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.
How does family income policy work?
A family income policy, sometimes called a family income benefit (FIB), is a type of term life insurance policy. The policy is active for a certain number of years (the term) and the insurer pays a death benefit to your beneficiaries if you die during the term. FIB benefits are paid monthly.
When you’re buying your policy, you’ll decide how much money will be paid out per month and how long the policy lasts.
For example, let’s say you’d like your family to receive $5,000 per month to replace lost income after you die.
In this case, if you die five years into a 20-year term life policy, it will pay out $5,000 a month for the next 15 years (a total payout 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 (a $300,000 total payout).
Since the death benefit decreases as time goes on, family income life insurance is a form of decreasing term life insurance.
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.
Pros of a family income policy
A family income policy replicates getting an income from the breadwinner, so it’s more true-to-life and easier to manage than a lump sum. Death benefits can total $1 million or more, so it can be difficult to decide how to use the payout while navigating other end-of-life processes and grieving.
The policy is also structured so that it provides the support your beneficiaries need when they need it the most. You’ll have the most coverage early on in the term — when your children are still young, for example — but you’ll likely need less coverage later in the term, after you’ve saved for retirement and paid down your debts. In this case, the decreasing death benefit may still be enough to support your family.
Cons 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.
Even if you need less coverage as you age, a life insurance policy can still cover existing debt or help your family maintain their lifestyle if you pass away. A policy with a diminishing value likely won’t be able to provide that support.
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.
This rider typically comes at an extra cost, which varies by insurance provider.
Some insurers may not offer this rider, so it can be helpful to work with an independent broker who can help you compare options from multiple companies.
Your beneficiaries can also choose to receive the death benefit as a life insurance 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 insurance company.
The death benefit is disbursed to beneficiaries in installments over a term of their choosing (usually 10 to 20 years, or the rest of their lives), like in a family income policy.
The difference is that, with an annuity, your beneficiaries receive the full benefit amount no matter when you die.
An annuity may raise some tax and investment considerations, whereas proceeds family income policy generally aren’t subject to taxes. Consult with a financial advisor to decide if a life insurance annuity is right for you.
Is a family income policy worth it?
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.
For most people, a standard term life insurance policy with a lump sum death benefit payout is the best and most straightforward option.
It’s better to name beneficiaries you trust to make a levelheaded decision with the insurance payout and make sure they know their options.