Life insurance provides for your loved ones after your death. It can pay for your final expenses, take care of any outstanding debt or provide financial security for your family’s future. For many life insurance policies, the death benefit—the amount of money your beneficiary receives—is paid out as a tax-free lump sum. At that point, they’re allowed to do what they want with the money.
If you think your family would be overwhelmed at the prospect of managing such a large sum of money, there’s another available option. A family income life insurance policy allows you to manage the distribution of the death benefit over a long-term period instead of all at once. While most people are best served by the traditional method of payout, there are situations where a family income policy may make more sense.
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
Family income policies have one major drawback. They decrease in value the longer you’re alive. Because your beneficiaries receive installments based on when you pass away, they’ll get less benefit if the policy is active and unused. This type of insurance policy is called decreasing term life insurance.
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 ten years—a significantly lower amount.
Family income policies are subject to the same rules as other life insurance coverage. Your premiums are determined by your level of coverage, age, finances, lifestyle and health. Engaging in risky hobbies or having chronic health conditions can impact your premiums; you’ll pay more for coverage and get less value from your policy.
If you have good financial standing, you may not need a large life insurance payout after your kids are grown. A life insurance policy can still help with outstanding debt. Policies with diminishing returns—such as family income policies—may not support an existing lifestyle. In these cases, a traditional term life or permanent life insurance policy may make more sense.
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?
Family income policies can be cheaper than traditional life insurance, but are still subject to factors like age, health, duration of the policy and size of the income you want to payout.
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’ll want to 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
Providing for your family after your death takes many forms. If you have questions about family income insurance policies or about adding a family income rider to your existing coverage, SelectQuote can help. We compare rates and policies from some of the most trusted insurance companies. Our process can help save you time, money and worry. Learn more about how to get a family income policy, term life insurance policy or whole life insurance coverage today.