A family income policy is a unique form of life insurance designed to provide steady, long-term financial support to surviving family members in the event of the policyholder's death. Unlike traditional life insurance policies that pay out a lump sum, a family income policy disburses regular payments over a specified period, ensuring a consistent income stream for the beneficiaries.
This approach aims to safeguard the financial well-being of the insured's loved ones, offering a sense of security and stability during a challenging time. Understanding the nuances of this specialized life insurance product empowers individuals to make informed decisions about their family's financial security. In this article, we’ll discuss how a family income policy works, the benefits of this type of coverage, and the drawbacks of this approach.
How does a family income policy work?
Family income life insurance policies—also known as family income benefits—work differently from traditional life insurance. Instead of a one-time payout, the death benefit is paid as a monthly income stream. Much like traditional term life insurance, when you buy the insurance policy, you decide the desired amount of coverage and the length of time it will last.
Let’s say you have a relatively young family, make $3,000 per month, and want your family to receive that specific amount over a period of 20 years. You’ll need to determine just how much insurance you’ll need to make that happen.
Family Income Policy Benefits
One of the benefits of a family income policy is that it acts as an income replacement for a breadwinner, which makes it more life-accurate and easier to manage for your family. In addition, if your death benefits total $1 million or more, it might be difficult for your family to manage such a large sum of money while also dealing with everything else.
The safety net that a family income policy provides can really help your family when they need it most—when you have young children, for example—but it won’t have a negative impact on your finances if you die late in the term.
Family Income Policy Drawbacks
While offering several benefits, a family income policy also has certain drawbacks that are important to consider when deciding whether it meets your specific financial needs and circumstances.
Decreasing Death Benefit: The death benefit payout from a family income policy decreases over time, meaning that if the policyholder lives for an extended period, the beneficiaries will receive fewer monthly payments. This means beneficiaries may not receive as much financial support as they initially anticipated, especially in the later years of the policy. For example, if you buy a family income policy for 30 years and die five years in, it will pay out for the next 25 years. If you die 20 years into the policy, it will only pay for the next 10 years—a significantly lower amount.
Premium Costs Linked to Personal Factors: The premiums for family income life insurance depend on various factors such as the policyholder's health, lifestyle, and age. Individuals with certain health conditions or risky lifestyles may face higher premiums, potentially making the policy as expensive as a whole life policy while not offering life-long coverage.
Limited Financial Flexibility: Unlike a traditional death benefit, the fixed monthly income from a family income policy may not address immediate large expenses or unforeseen financial needs that may arise after the policyholder's demise. This limitation in financial flexibility could potentially pose challenges for the beneficiaries.
Loss of Lump Sum Benefit: In certain situations, such as needing a large lump sum for immediate expenses after the policyholder's death, the monthly income from a family income policy may not be as beneficial as a lump sum payout. This loss of immediate liquidity could impact the beneficiaries' financial planning.
How long should I have a family income policy?
If you decide that a family income policy makes the most sense for your needs, you’ll likely only carry it until your children are old enough to be financially independent. Some policyholders decide to keep the coverage until they reach retirement age. Because this policy loses its effectiveness as you age and start saving for retirement, it may not make sense for your finances.
How much does a family income policy cost?
The cost of a family income policy varies depending on several factors, including:
Age and Health: Younger, healthier individuals generally pay lower premiums for life insurance, including family income policies.
Coverage Amount: The amount of coverage desired will affect the cost of the policy. Higher coverage amounts typically result in higher premiums.
Policy Length: The duration of the policy, or the period over which the income benefits will be paid, can impact the cost. Longer policy lengths may result in higher premiums.
Rider Selection: Additional riders or features added to the policy, such as disability or critical illness riders, can increase the cost.
Insurance Company: Different insurance providers offer varying premium rates based on their underwriting criteria and risk assessments.
Family Income Policy Alternatives
If you think you need a standard term life insurance policy but like the idea of regular payments versus a lump sum, you do have options. You could add a family income policy rider, which pays the monthly payment in addition to your lump sum death benefit. Some insurance companies charge extra for this type of coverage, so be sure to compare rates from different companies.
You could also instruct your beneficiaries to receive the death benefit as an annuity. The death benefit is used to purchase the annuity, an investment vehicle that the provider manages. Instead of receiving the lump sum payment directly, the amount is disbursed over a period of time in installments. Annuities allow your beneficiary to receive the full amount over time, no matter when you die. There are some tax implications, however.
You should speak with a financial advisor to iron out all the details and determine if this is the right type of policy for you.
SelectQuote Can Help You Find the Right Insurance Policy for Your Needs
When you’re shopping for life insurance coverage, it’s important to consider all your options, including a family income policy. With nearly 40 years of industry experience, our licensed insurance agents can help you explore different types of life insurance coverage so you can find the policy that’s the right fit. In just minutes, we’ll provide you with unbiased quotes from several of the nation’s most highly trusted carriers—all in one place.
