Family Income Protection Plans
The loss of a parent’s income can have a serious impact on a family, whether it is because the person has died or is absent from work for a lengthy period. However in both cases provision can be made to replace the lost income with family income protection plans.
To insure the family against the premature death of a parent, a Family Income Benefit plan can be considered. This is a life insurance policy which pays a regular monthly sum to the surviving spouse or children for the remainder of a pre-set term. As children may enter higher education and can still be financially dependent on the parents, it is common to arrange cover until the youngest child reaches the age of 25.
As it is the take-home pay which is to be replaced, the annual benefit should be the monthly net pay multiplied by twelve. If a claim is made, benefits are payable tax-free. So for someone earning £30,000 a year gross they will probably take home around £2,000 a month after tax and other deductions. So cover would be for £24,000 a year. You can however insure for different amounts if preferred.
The financial liability for the insurer reduces as time goes by. This is because the plan pays benefit for the remainder of the original term if death should occur. So if you took a 20 year plan and died in year one, then in the example above the policy would pay out £456,000 over the next 19 years. But if you died in year 18, the payout would be £48,000 over the remaining two years left on the plan. The benefit is therefore similar to a ‘decreasing term’ insurance policy. The plan would end when the last of the children ceased to be financially dependent on the surviving parent – but this can be some years after their formal education ends!
Family income protection plans can be arranged in the joint names of both parents. If one died, the plan would begin to pay out to the surviving partner. Cover can be index linked to keep pace with inflation. However frequent reviews of your income and situation are recommended to provide full protection at all times.
Disability & Illness
What if you suffer an illness which prevents you from working for an extended period, or forces you to stop working altogether? As a parent your family’s income could be severely reduced, and even if your employer provides a temporary income, this will usually end after a protracted illness. Reliance on state benefits could see your living standards severely compromised.
A protection plan known as an ‘income replacement plan’ (previously known as a ‘permanent health insurance’ policy) can be arranged which is designed to produce a replacement monthly income will help to keep the family life as it was before. You can insure for around 50% – 60% of your pre-illness gross earnings. Monthly costs are dependent on the sum insured, your age, sex, state of health, lifestyle and hobbies, occupation and smoker status.
The big difference between the Family Income Benefit plan and the Income Replacement Plan is simply that the former requires the insured person to have died, whereas the latter pays out only whilst the insured person is off work poorly. The benefit ends when the policyholder returns to work or the cover period ends.
Income Replacement policies are arranged in single names only. Cover needs to be reviewed regularly.
Andy Wilson can help you to protect your self and your family against a loss of income from unforeseen events. Please use the ‘Contact Andy’ form below to ask any questions or to arrange a no-obligation meeting, at Andy’s expense and not yours, to discuss your requirements.