MoneyLife

Do You Need a Family Income Benefit Policy?

By Marc Guberti
family income benefit

A financial safety net can benefit any and every family. These types of investments and policies help families provide their heirs with a payout when they pass away. Similarly, a family income benefit policy provides your beneficiaries with an extra layer of security as they navigate their financial journeys.

What is a family income benefit and how does it work?

A family income benefit is a life insurance policy that distributes the payout in monthly increments rather than as a lump sum. A one-time payment leaves no room for error if your beneficiaries use spending as a coping mechanism. Plus, monthly payments provide your beneficiaries with a temporary income source to supplement their existing salary.

A family income benefit policy can offer an extra layer of financial security. You can further bolster your finances with MoneyLion’s Safety Net feature as well. MoneyLion provides access to 0% APR cash advances and fully-managed portfolios as well as ways to stay on top of your finances. Bolster your financial Safety Net with MoneyLion today.

What type of plan is a family income benefit plan?

A family income benefit plan is a term insurance policy, meaning these policies will expire within a specific timeframe. Your heirs will not receive the monthly payouts if you outlive your policy.

Is family income benefit a decreasing term insurance?

Family income benefit is a decreasing term insurance policy. For instance, if you die three years into a ten-year policy, your beneficiaries will receive monthly payments for seven years. However, if you die seven years into a ten-year policy, your beneficiaries will only receive monthly payments for three years. The longer you stay alive, the more the policy’s value declines. 

How long does a family income benefit payout last?

A family income benefit payout will last for the remaining length of the policy. If the policyholder dies when there are still three years left on their family income benefit policy, then beneficiaries will receive monthly payments for three years. The further away from the expiration date, you are when you die, the longer the monthly payments will be paid out.

Can family income benefit be put in trust?

You can put a family income benefit policy into a trust. This will allow your beneficiaries to receive immediate access to the monthly payouts rather than having to wait for the probate process to be finalized. However, placing a family income benefit policy into a trust will not protect those proceeds from inheritance taxes.

Example of a family income benefit

Let’s imagine there’s a parent who takes out a thirty-year family income benefit policy to provide their children with an extra layer of financial security. The parent dies ten years into their policy. The beneficiaries receive monthly payouts for the duration of the policy. In this example, since ten years passed on a thirty-year policy, the beneficiaries will receive monthly payouts for the next twenty years.

Factors involved with a family income benefit policy

While a family income benefit policy will assist your heirs, the policy is not for everyone. Before taking out a family income benefit policy, consider the following factors.

Your age

Your family income benefit policy will lose value as it approaches its expiration date. The policy delivers higher payouts when policyholders die early. A family income benefit policy does not make much sense for younger policyholders who are likely going to outlive their policies.

Your ability to pay premiums 

Premiums are what allow you to maintain your policy. The moment you stop paying your premiums, an insurer can void your policy. If you have a tight budget, it’s best to avoid additional expenses, premiums included. 

Even if your current budget allows you to afford premium payments, consider any and all upcoming expenses. For example, if your child is going to start attending college soon, then your costs will look significantly different in the near future. You wouldn’t want to pay monthly premiums for a few years only to realize you can no longer afford to make those payments anymore. 

Your family finances

A family income benefit policy is more urgent if the policyholder is the sole income provider for their family. In houses with multiple income producers, it’s easier to cushion the financial impact of losing a family member because the other income provider can step up to the challenge of financially providing for the family after a death occurs. 

However, losing the sole income provider can create financial devastation at the worst time possible. Family income benefit policies make more sense for policyholders who want to rest assured knowing that their beneficiaries’ lives won’t be destroyed from a financial perspective if the provider dies early.

Your family debts

Monthly payouts will replace your income, but a lump sum payout makes more sense for debt-strapped beneficiaries. Receiving a lump sum payout will make it possible for your heirs to immediately pay off their debt rather than having to chip away at it each month. Quickly paying off debts will allow your beneficiaries to escape long-term interest payments that make their debt more difficult to pay back.  

Your beneficiaries’ money management skills

Although a lump sum payout allows beneficiaries to cut down on their debt, some may emotionally spend the money instead of putting it towards their debts. Monthly payments will give beneficiaries time to cope with the stress of losing their loved ones while avoiding any urge to overspend. 

The lump-sum payout will only happen once, and a beneficiary can squander the payout without any chance of undoing their decision. Monthly payouts will prevent this scenario from becoming a reality. These payouts work best for beneficiaries who aren’t the best at managing money or have a history of emotional spending.

Advantages of a family income benefit 

A family income benefit will provide your beneficiaries with monthly payouts that match the income you made each month. This extra layer of financial security will provide your beneficiaries with additional time to get back on their feet and adjust to life without you. The monthly payouts will allow your beneficiaries to receive their payout gradually, which decreases the risk of overspending.

Disadvantages of a family income benefit

A family income benefit policy can expire when you are still alive. The policy will lose value as it ages, meaning if you die eighteen years into your twenty-year policy, your beneficiaries will only receive monthly payouts for two years. A lump-sum policy can speed up a beneficiary’s ability to pay off debts, but a family income benefit policy provides monthly payouts rather than an immediate lump-sum payout.

Family income policy vs family maintenance policy

A family maintenance policy provides beneficiaries with monthly payouts for a set period after the policyholder’s death, whereas a family income benefit policy will only provide monthly payouts for the remaining length of the insurance policy after the policyholder’s death. A family maintenance policy also provides beneficiaries with a lump sum at the end of the policy, unlike a family income policy.

Fortify your finances

A family income benefit policy is one way to bolster your financial fortress. MoneyLion can provide you with even further protection. You can get started on RoarMoney and access fully-managed portfolios, a round-up feature that helps you invest your change, an auto-investing tool, and other tools designed to give you a financial edge. Get started with RoarMoney today for only $1 per month!

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