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A family income policy distributes the death benefit to your beneficiaries in monthly installments for a set term, rather than in one lump sum.
Family income insurance lasts for a set term, after which point the policy expires
When you pass away, beneficiaries receive the death benefit in predetermined increments every month
Monthly payments help beneficiaries who would struggle to manage a lump sum payout
The death benefit decreases in value the longer the policy is active
With most life insurance policies, the death benefit — or the portion of money that’s paid out to your beneficiaries — works the same way. A tax-free lump sum of money is given out after the policyholder dies. The beneficiaries are then free to do whatever they want with it.
But is it really useful to get one pot of money instead of spreading it out? A family income life insurance policy distributes the death benefit in a different way, treating the death benefit like a steady income stream instead of a one-time payout.
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It’s easiest to think of a family income policy, sometimes called a family income benefit (FIB), as a term life insurance policy. The policy is active for a certain number of years (the term), at which point it expires. If the policyholder dies within that time, then the life insurance company pays out the death benefit.
Where things change is how the death benefit is distributed. With a traditional term life insurance policy, the death benefit is paid out all at once and that’s the end of the policy. With a family income policy, rather than a lump sum of money, the death benefit is paid out in monthly increments. The term and amount are decided on when the policy is purchased. For example, a $500,000 policy may pay out 1%, or $5,000, per month to replace lost income.
It’s important to note that the policy still ends when the term is up. In the above example, if you die five years into a 20-year term policy, it will pay out $5,000 a month for the next 15 years; if the death occurs 10 years into the policy, the monthly $5,000 will be paid out for 10 years, and so on. At the end of the 20-year term, the monthly installments end. So more specifically, a family income policy is a type of decreasing term life insurance, since the value of the death benefit decreases the longer you live.
A family income policy otherwise works like most other life insurance policies. For example, you can customize your policy by adding riders to it.
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A family income policy is most useful if your loved ones would benefit from having the payout dispersed over a longer period of time. These policies can also be helpful if your family may need more money upfront but less down the line — to provide an income if you die while your spouse is still raising your children, for example — and won’t be negatively affected by the diminishing death benefit.
Family income policies provide a constant stream of money, potentially for years. This is in contrast to the typical death benefit, which is given out as a lump sum. It can be difficult to decide how to use that large lump sum, potentially in the hundreds of thousands of dollars, while navigating other end-of-life processes and grieving.
Some beneficiaries might be overwhelmed by their choices with that much money. 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 downside of a family income policy is that it decreases in value over time. Your beneficiaries receive installments depending on when you pass away, so they’ll get more money if you die five years into a 20-year policy than they will you die 15 years into the policy.
By its nature, you get less the longer the policy is active and unused. Unlike a traditional level term policy, where the premiums and death benefit are the same for the entire term, a family income policy will be worth less the later it’s triggered.
But 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 after the underwriting process. That means you could pay the same or more than you would for term life coverage and get less value from your policy in return.
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. Family income riders work like a standalone family income policy, except that the monthly payment from a family income rider is paid in addition to the lump sum death benefit of your policy. Some insurers offer this option at no extra cost, but since a family income rider increases the total death benefit available to your beneficiaries, adding one to a policy may increase your monthly or annual premium.
You can also advise your beneficiaries to ask to receive the death benefit as an annuity after you pass away. With this option the death benefit is used to purchase the annuity, which is a type of investment vehicle managed by the provider. The death benefit is disbursed to beneficiaries in installments, like income. Beneficiaries receive those payments over a term of their choosing (usually 10, 15, or 20 years or for the remainder of their life). An annuity might net a death benefit greater than the original lump sum, but it does raise some tax and investment considerations worth discussing with a financial professional.
At the end of the day, it’s important to speak to a licensed insurance agent or financial adviser to see which policy type is right for you. A family income policy provides the death benefit in a unique way, but may not provide the full coverage needed with its decreasing value. The last thing anyone wants is to find out decades into a policy that it’s not going to be enough — so it’s crucial to make the right choice up front.
About the author
Amanda Shih is an insurance editor at Policygenius in New York City. Previously, she worked in nonfiction book publishing and freelance content marketing. Amanda has a B.A. in literature and communication from New York University.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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