The Difference Between Life Insurance And Family Income Benefit

Life insurance is a basic insurance product that provides family financial protection should the policyholder pass away. With life cover the amount insured is payable as a lump sum when the policyholder passes away. The funds provided by the policy are usually paid directly to the family of the policyholder (a process that is speeded up if they are named as beneficiaries) and can be used for whatever the family decide, such as living expenses, funeral costs or debt repayment.

Family income benefit is a type of life insurance, much like term insurance, decreasing term insurance and whole of life insurance are types of life cover. The key difference is that the benefit payable is not in the form of a lump sum but in the form of a monthly income. For example, instead of insuring a lump sum amount that is payable all in one go upon the death of the policyholder a monthly amount is insured and is paid in monthly instalments upon the death of the policyholder.There are some distinct advantages of family income benefit over normal life insurance (or term insurance more specifically). The first advantage is that the method of monthly payments ensures financial prudence on behalf of the deceased’s family. With this type of policy the policyholder can rest assured that his or her family have a stable amount of incoming funds to provide for themselves. In other words, the risk of the family spending too much of the payout in the early years resulting in poverty in the latter years is much reduced. The second big advantage of this type of cover is that the rates charged are far lower because the insurer does not have to payout the full sum all in one payment. The insurer can therefore use those funds to earn interest thus allowing them to charge a lower rate on the cover provided.Although family income benefit has some distinct advantages it also has some potential drawbacks. Given that the policy has a finite term there is the risk (in financial planning terms) that the policyholder dies a few years before the policy ends. In this case, instead of the family getting a significant lump sum they would only have a few years of monthly payouts before the policy ends, which could leave them in financial hardship in later years. The second major risk is that the deceased leaves unpaid debts that their family have to undertake and payoff themselves (or must be paid out of the deceased’s personal estate, thus reducing any inheritance). The family will also have to incur any associated funeral expenses which can amount up to a significant sum, especially for lower income groups. Thus, in these cases a monthly income would not be sufficient to ensure financial stability and a lump-sum payment would be far more appropriate to cover up-front lump-sum costs associated with the policyholder’s death.Given the positives (lower rates and a stable monthly benefit) and the negatives (lack of funds for lump-sum expenses and the risk of a suboptimal cumulative payout) it is important to assess whether a family income benefit policy is appropriate on an individual basis. For anyone who is unsure of the right policy choice it is best to seek life insurance advice from a broker or financial advisor. If the cover is required to protect a mortgage loan then family income benefit should be fine but this type of cover may not be right for family protection purposes.