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Life Insurance Guide

Family income benefit (FIB)

Some people prefer to ensure their families will receive an annual income over a set number of years.

This is what family income benefit (FIB) policies do: you decide on the income and the number of years you want it to last, then insure for a set number of years – usually until children are grown up.

The policy will pay out on death. But the policy is “decreasing”: it pays out over the remainder of the term itself.

This means that if you die with 10 years to go, it pays out 10 years’ worth of income. If you die with five years remaining, that’s what the policy pays, and so on.

The advantage of these policies is that because they are “decreasing”, they are cheaper than typical products. And the fact that they provide a guaranteed income can offer greater security than those which pay out a lump sum – but are more subject to stock market uncertainties.

Other points to note

Joint life: instead of you and your partner taking out separate insurance policies, you could take out a joint life policy.

This has some variants:

• “First death” covers both your lives and pays out once on the death of the first of you to die

• “Last survivor” pays out once on the death of the second of you to die. For protecting dependants, the “first death” option is usually the more appropriate

A joint life policy will be suitable if you both need to insure for the same amount, such as paying off a mortgage.

But it is less suitable as a means of replacing lost income, since the income needs will vary depending on which of you has died. For that, it may make sense to insure separately.

Writing a policy in trust

When you take out life insurance, you don’t want payouts to fall foul of inheritance tax. Moreover, you want the money to go to your dependents quickly, without having to settle the estate first.

Writing an insurance policy “in trust” avoids these problems by ensuring that the policy pays out direct to your dependants, bypassing your estate altogether.

Most insurance companies have standard forms for doing this and it usually costs nothing to write your policy in trust. Therefore, if your life insurer doesn’t ask you first, make sure you get one of these forms, fill it in and send it back.

Life-of-another

A husband may take out insurance against the life of his wife, and vice versa. However, at the time the policy is taken out they MUST have an “insurable interest” in the life of the person covered.

This means that one must stand to lose financially if the other were to die. Husbands and wives are automatically assumed to have an “unlimited insurable interest” each other’s lives. Others may be permitted in discussion with the life company concerned.

The main disadvantage of a life-of-another policy is if your relationship breaks down: your former spouse or partner owns the policy and has the absolute right to the proceeds if you were to die.

On the other hand, where a relationship has already broken down, a life-of-another policy taken out by one parent – with the children being identified as the beneficiaries – protects the family against the loss of maintenance payments.

This is why such a policy is always useful if couples split up and child maintenance is an ongoing issue. For your children’s sake, make sure that such a policy is in place.

More pages

Page 1: Introduction
Page 2: Family income benefit (FIB)

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