The loss of a parent’s income can have a serious impact on a family. This can be because either 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.
A ‘family income protection plan’ can be considered to insure the family against the premature death of a parent. This is a life insurance policy also known as a ‘Family Income Benefit’ plan. This pays a regular monthly sum to the surviving spouse or children in the event of the insured person’s death. The monthly benefit continues for the remainder of a pre-set term. As children can still be financially dependent on parents for some time after leaving education, it is common to arrange cover until the youngest child reaches the age of 25.
How much cover is needed?
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. For example, 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 remaining 19 years. However, if you died in year 18, the payout would be £48,000 over the remaining two years. The benefit is therefore similar to a ‘decreasing term’ insurance policy. Normally, we would recommend that the plan term ends when the last of the children is likely to cease to be financially dependent on the surviving parent. However, this needs some thought as we all know 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 Protection
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. Even if your employer provides a temporary sick pay, this will not usually cover 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. This is designed to produce a replacement monthly income will help to keep the family going financially. You can insure for around 50% – 60% of your pre-illness gross earnings. Monthly costs are dependent on the sum insured, your age, sex, health, lifestyle, hobbies, occupation and smoker status.
What are the differences?
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. However, family income benefit will normally be arranged in joint names. Cover needs to be reviewed regularly.
We can help you to protect yourself and your family against a loss of income from unforeseen events. Please use the ‘Contact Us’ form below to ask any questions or to discuss your situation and requirements.
THE PLAN WILL HAVE NO CASH IN VALUE AT ANY TIME AND WILL CEASE AT THE END OF THE TERM. IF PREMIUMS ARE NOT MAINTAINED, THEN COVER WILL LAPSE.