There are plenty of ways to protect your family should the worst happen to you. Life insurance and family income benefits are two popular strategies in particular. Both of these protection products can pay out if you die during the policy term, however, they do so in very different ways.
In this guide, we’ll explain the main differences between these policies and which may be suitable for your circumstances.
Life insurance
Life insurance is a tried and tested form of cover. Under the policy your life is covered for a lump sum which is paid out if you die during the policy term. The money is given to your chosen beneficiaries who can use the money however they choose.
It’s commonly used to cover a mortgage, support dependents, or to be left as a financial gift.
There are several types of life insurance to choose, from including:
- Term life insurance − which covers you for a set amount of time (usually between 5-50 years). The policy pays out so long as you die within the term, otherwise it expires.
- Whole of life insurance − which provides cover for the rest of your life as long as you pay your premiums. Under this policy, both the payout and premium are fixed.
- Mortgage life insurance − a policy designed specifically to repay the outstanding balance on your mortgage if you die before it’s fully paid off. Decreasing term policies are often chosen for this.
- Joint life insurance − popular with couples as it covers two people under a single policy. It either pays out on the first death or once both policyholders have passed away.
Family income benefit
Family income benefit is an alternative to life insurance, where instead of a lump sum, it pays a regular tax-free monthly income. These payments continue until the end of the chosen policy term.
So for example, if you pass away five years into a 20 year policy, your family would receive monthly payments for the remaining 15 years of the term.
Similar to term life insurance, it won’t pay out if you’re still alive at the end of the term.
It’s designed to replace lost income rather than clear large debts or long-term costs. Instead it can help cover everyday expenses like bills, shopping, childcare, and other household costs.
If you’re looking to cover your income, income protection insurance may be a better choice as it provides an income if you’re unable to work due to illness or injury. Whereas, family income benefit is specifically focused on providing a steady cash flow for your loved ones.
Differences between life insurance and family income benefit
Both of these types of protection have their strengths and weaknesses. The table below outlines the main differences between the two.
| Feature | Life Insurance | Family Income Benefit |
| How it pays out | Lump sum | Regular monthly income |
| Best for | Mortgage, debts, inheritance | Replacing income |
| Payment duration | One payment | Monthly until policy ends |
| Who decides how it’s spent | Beneficiaries | Fixed as ongoing income |
| Typical cost | Price varies | Often lower for equivalent cover |
On paper, neither option is necessarily better than the other. What it mainly depends on is whether your family would cope better with a lump sum, a monthly income, or a mix of both.
Which option is better for families?
A lot of parents lean towards family income benefit simply because it mirrors a wage. Instead of having to manage a lump sum during an already difficult time, the money just lands in the bank each month the way a salary would.
So if you’re more concerned with keeping the household running day to day, family income benefit might suit you better, since it replaces the ongoing income rather than handing over one large amount to manage.
Whereas a parent with a 20-year mortgage and two young children, may prefer to have life insurance. In this case, they might take out a decreasing term policy to cover the mortgage.
Can you have both?
Yes, and it’s actually quite common. There’s nothing stopping you combining the two to cover different needs at once, rather than trying to make one policy do everything.
A typical setup might be a decreasing term policy to cover the mortgage, family income benefit to replace your monthly income, and something like critical illness cover or income protection on top, which pays out while you’re alive rather than after.
Is family income benefit cheaper?
It can be, though it’s more about how the cover works.
Because the amount your family could claim gets smaller each year the policy runs, it costs the insurer less to cover you towards the end of the term than at the start, and that saving gets passed on to you as a lower premium.
That said, cost still comes down to the usual factors, including your age, health, whether you smoke, your occupation, and how much cover you need over how long.
How much cover do you need?
There’s no set answer here, it depends entirely on your circumstances. Think about how much you’d still owe on your mortgage, your household bills and everyday living costs, how many children you have and their ages, and any savings you already have to fall back on.
It’s also worth checking what protection you might already have, including whether your employer offers death-in-service benefit, a payout often worth two to four times your salary that some employers provide automatically as part of your job.
If you’re not sure how much cover makes sense, it’s worth speaking to a life insurance adviser like Cavendish Online who can look at your situation in more depth.
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