What is Family Income Protection Insurance?

Life insurance policies are essential for families with children or other dependents, giving grieving families peace of mind and financial stability. While many families opt for a lump sum benefit, did you know this isn’t the only way to receive life insurance benefits? This is where family income protection insurance comes into play.

Keep reading to learn more about family income protection insurance, including what it is, how it works, and why families should consider it.

What is Family Income Protection Insurance?

Also known as a family income benefit plan, family income protection insurance is a form of life insurance providing a regular monthly income to surviving family members if the insured individual passes away or becomes terminally ill.

With most life insurance policies, the benefit is paid out in one lump sum. But this is just one way to receive benefits. With a family income policy, you’ll receive monthly payments rather than one giant payout.

Here’s an example: Let’s say that Bill passes away, and he has a family income protection policy. Rather than his wife and kids receiving a $500,000 benefit right away, they receive monthly payments of $5,000, helping them cover the mortgage and pay the bills as they grieve Bill’s death.

While many families prefer the lump sum option, there are some circumstances where monthly payments can be better. For example, if your family doesn’t manage money well and might find a large sum of cash stressful to manage, family income protection insurance would be a good option.

How Family Income Protection Insurance Works

Family income protection insurance is a type of term life insurance – this means that the policy only lasts for a set period of time. If the insured policyholder passes away during the term or while the policy is still active, the benefit kicks in so that the beneficiaries receive monthly payments for a specific period.

With this form of term life insurance, the monetary value of the death benefit decreases over time. The number of monthly payments will depend on when the policyholder dies. This means that deciding how long the term lasts, along with the monthly payment, is extremely important when purchasing this kind of policy.

If you’re the primary breadwinner or the only breadwinner in your family, family income protection insurance can be very helpful for your loved ones in the event of an early death. Be sure to calculate how much life insurance you need before setting it up!

Family Income Rider Example:

Suppose you purchase a 30-year family income policy that will pay your beneficiaries $3,000 monthly upon your death. If you pass away three years into the policy term, your family will receive benefits for the next 27 years. On the other hand, if you pass away 25 years into the policy term, your loved ones will only receive benefits until the end of the term, which would be five years.

Advantages and Disadvantages of Family Income Protection Insurance

There are several factors to consider when deciding on family income protection insurance. While it’s the right decision for many people, it isn’t always the best option for everyone – it depends on your lifestyle and financial circumstances.

Pros of Family Income Protection Insurance:

Here are some advantages of this type of insurance:

Monthly payments can replace the primary breadwinner’s income – this is especially helpful if this person is the only breadwinner for the family.
Large life insurance payouts can feel challenging and overwhelming after a death. Monthly payments are easier to manage.
A lump sum can lead to impulsive financial decisions, especially during a time of grief.
The policy can last while your children are young and then phase out when they are financially independent adults.
Term life insurance is usually cheaper than whole life insurance, saving you money each year.

Cons of Family Income Protection Insurance:

Here are a few disadvantages of family income protection policies:

The death benefit decreases every year of the term. This means that the longer the policyholder lives, the less benefit the beneficiary receives.
Your circumstances, including health and lifestyle, could impact the cost of your premiums. Because of this, your premium cost may be as high as whole life insurance without the guaranteed benefit.
Once the term expires, the insurance coverage ends. In other words, it’s not guaranteed!

What To Think About When Buying Income Protection Insurance

There are three primary levels of coverage when it comes to income protection insurance:

Own occupation: This will cover you if you cannot work in your current job due to illness or death. While this is the most expensive option, it’s also the most likely to lead to successful claims.
Suited occupation: This will cover you if you cannot do your own job or a similar role that suits your experience and qualifications.
Any occupation: This applies if you cannot do any kind of work. While this is the cheapest option, it’s usually the least likely to pay out according to your needs.

Read the Fine Print

Thoroughly read through the policy’s terms and conditions before committing to anything. It’s important to know exactly what is and isn’t covered. If you see something you don’t understand, ask an insurance broker or financial advisor.

Change Your Mind if Needed

You’ll typically have 30 days after buying the policy to change your mind and request a refund.

Why Families Should Consider Income Protection Insurance

You might assume your employer will continue to provide income protection if you cannot work due to illness or death. However, this isn’t always the case. Here are a few instances when families should consider income protection insurance:

If you are in a single-income or dual-income household where one person makes significantly more than the other, income protection insurance can help if the primary breadwinner cannot work.
If you are self-employed, income protection insurance is an excellent idea since you don’t automatically have coverage through an employer.
If you do not have at least a year’s worth of income saved in your bank account, income protection can be helpful in case of an emergency.

Who Doesn’t Need Income Protection Insurance?

You may not need income protection insurance if:

You could get by solely on your sick pay – your employee benefits package may provide income for 12 months or more.
You are eligible for government benefits that are significant enough to cover your living expenses for at least a year.
Your partner makes enough money to support you and your family.
You have enough investments to cover an early retirement.
You have enough savings to support your family – ideally, at least a year’s worth of savings.

How to Get Income Protection Insurance

Follow these steps as you are shopping for income protection policies:

Research Providers

Look for companies with solid financial stability, a strong track record of paying out claims, and positive customer reviews. You can read reviews online or ask friends and family if they have had good experiences with their current insurance providers.

Understand Premiums and Exclusions

Pay careful attention to premiums and exclusions as you research insurance options. Your premium can depend on age, health, and occupation. Exclusions might be even more important – knowing what isn’t covered will prevent negative surprises later.

Read Policy Reviews and Details

After narrowing down your choices, review each policy in detail. Pay close attention to waiting periods (before benefits start) and the duration of the payouts.

Consult with a Financial Advisor or Insurance Professional

If you need help clarifying policy details or want questions answered, reach out to a financial advisor or insurance professional. They can help you understand the jargon within each policy.

Factors That Affect Premium Costs

Many elements can influence the cost of family income protection premiums. Here are some of the most important factors:

Age: The older you are, the higher your premium is likely to be, as your risk of death increases. That’s why taking out a life insurance policy when you are younger is often better.
Occupation: Someone who is a doctor will likely have a higher premium cost than a teacher. The more money you make, the more money the insurance provider will need to pay out if you pass away – that’s why higher-earning individuals will likely have higher premiums.
Smoking: People who smoke have a much higher risk of illness and death, so smokers will almost always pay more in life insurance premiums.
Percentage of Income Covered: People with a policy paying out only 50% of their income will likely have a lower premium than someone with a policy covering 90% of their income.
Waiting Period: Shorter waiting periods are more likely to lead to higher premiums, while longer waiting periods have lower premiums.
Illnesses and Injuries Covered: The more illnesses and injuries covered under a family income protection policy, the higher the premiums.
Current Health: Good health can lead to lower premiums compared to those with poor health or preexisting conditions.

If you want a lower premium, it’s a good idea to quit smoking, limit alcohol consumption, eat healthier, and establish an exercise routine. Keeping up-to-date on doctor’s appointments and medications can help manage preexisting conditions and improve overall health. The better your health, the lower your premiums are likely to be.

Claiming Family Income Protection Insurance: What to Expect

Claiming family income protection insurance can feel daunting, but understanding the process can help streamline the experience.

The first thing you’ll do after a diagnosis or death is notify your insurer. Then, you’ll gather the necessary documentation, including medical records, employment verification, and proof of income. Once you have everything you need, you’ll submit your claim.

Almost every family income policy has a waiting period before benefits begin. Depending on your policy, this period typically ranges from 30 to 180 days. You will not receive any payouts during this time, so it’s essential to plan financially for this gap if possible.

During this waiting period, your claim will either be accepted or denied. If your claim is denied, it may be due to inaccurate information, failure to meet the waiting period requirements, or your claim failing to meet the policy terms. Be sure to communicate frequently with your insurance provider so that the process goes smoothly, making sure you have everything you need.

Alternatives to Family Income Protection Policies

1. Family Income Rider

In many cases, you can add a family income rider to an existing life insurance policy to ensure your family will receive some monthly benefit. However, these riders will typically increase your premium cost. On the other hand, some policies offer a lump sum plus a monthly benefit, but this will depend on your particular policy.

2. Annuity Benefit

A death benefit can be set up as an annuity – this distributes monthly payments to your beneficiaries, who will decide if they want to receive payments for life or a shorter period of time. This differs from a family income policy since an annuity will pay the total value no matter when you die. It’s also a form of an investment account, so it has tax implications that a standard life insurance policy doesn’t have.

Conclusion

Family income protection insurance is vital for your family’s financial well-being and peace of mind. It’s always a good idea to consult an insurance professional or financial advisor to consider how full income protection insurance might benefit your family’s peace of mind and economic security.

At Think Life, we’re committed to providing the best coverage based on your needs and circumstances. Contact us today to learn more about our family income protection policies!

FAQs

Is income protection taxable?

In many cases, if you pay for the policy with after-tax dollars, the benefit is typically tax-free. However, if your employer provides the policy and deducts the premiums from your pre-tax salary, the benefits you receive may be taxed.

Can I get coverage if I already have health conditions?

Yes, it is possible to get coverage even if you have preexisting health conditions, but this may affect your premiums or the scope of your coverage. Insurers typically assess your health and medical history as part of the underwriting process.

Can policies be adjusted later?

Many family income protection policies allow for some level of adjustment or customization after the policy is purchased. For example, some insurers let you increase the coverage amount or extend the term under certain conditions, such as major life events like the birth of a child or purchasing a home.