Life insurance is always a tricky topic – asking ‘how would your family cope financially if you ‘popped your clogs’’? can often dampen the mood…
But it’s an important conversation nonetheless. And the positive aspect is having peace of mind that you’ve got sufficient protection in place to ensure your loved ones would be able to maintain a good quality of life should something happen to you.
How do they work?
A Family Income Benefit (FIB) plan is a specific type of life insurance that pays a regular income (typically monthly) in the event of the policyholder’s death, to the end of the original policy term.
With monthly payouts, this is designed to ease the burden of household bills. FIBs are commonly used by those with young families, facing a period of elevated spending, and with limited scope to reduce this without a material impact on their standard of living.
FIBs represent a form of decreasing term assurance – that’s because the potential payout decreases over time(as any income would be paid for a shorter period). The result is that FIB policies tend to be very low cost, much cheaper than traditional term assurance, which pays the same lump-sum amount regardless of when death occurs.
Disclaimer: Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.
Consider the following example:
Example
· Clients 1 and 2 (both aged 30) earn £100k and £30k a year respectively. They have two young children, aged 6 months and 3 years.
· Client 1 has a 4x death-in-service policy through work which would be sufficient to clear their outstanding mortgage debt. Client 2 has no existing cover in place.
· Using cashflow modelling, we identify there’s a shortfall in the event of each of their fatalities – that is, the surviving spouse would not be able to maintain ongoing spending needs.
· Assuming a 25-year timeframe (we typically match the policy term with a reasonable assumption for the children’s financial independence), they would need an extra £3k a month (Client 1’s death) and £1.5k a month (Client 2’s death) to plug the anticipated shortfall, rising with inflation each year.
· At the time of writing, the cost of this is ‘just’ £17 and £10 per month respectively.
Please note, the above figures are for illustrative purposes only based upon healthy individuals and on a non smoking basis. The exact cost will depend on your individual circumstances.
That is, for a combined £27 per month, they could plug the spending shortfall that would arise should either or both of them be run over by the proverbial bus.
As noted above, this is a form of decreasing term assurance because the potential payout reduces over time:
· For example, focussing on client 1’s cover in the example above, if he/she died just one month after taking out the policy, client 2 would receive £3,000 a month for the entire 25-year term – a total payout of £900,000.
· However, if client 1 died ten years into the policy, the total payout would reduce to £540,000 (15 years at £3,000 a month).
Conclusion
FIBs offer a low cost life insurance solution, particularly well-suited to those with young families facing an period of elevated essential spending.
I can attest to this and indeed, my wife and I have a FIB in place (#eatwhatyoucook).
In most cases, the financial impact of death reduces overtime, as you naturally accumulate wealth through pension contribution and other savings. As such, a decreasing term assurance policy is typically more suitable than a single lump-sum payout, which can potentially result in the policyholder being ‘over insured’ in later years.
