Life insurance payouts can create financial stability for grieving families, but they can also give rise to poor financial decisions and strife. Fortunately, lump sum death benefits are just one option for life insurance policies. A family income policy is a rider on life insurance that guarantees monthly payments to beneficiaries when the policyholder dies. The monthly payments are usually comparable to the policyholder’s salary or wages. Working with a financial advisor can give you the insight necessary to make the right estate plans to protect your family.
What Is a Family Income Policy for Life Insurance?
A family income policy for life insurance changes how your beneficiaries receive the policyholder’s death benefit. With most life insurance policies, the death benefit is a single lump sum payment. But a family income policy means your life insurance company distributes monthly payments instead.
Although most beneficiaries prefer a one-time payout for the death benefit, a family income policy can be better in specific circumstances. For example, suppose your beneficiaries don’t need the financial assistance from the death benefit or would find the amount of money from the lump sum stressful. In that case, a family income policy can be more manageable.
How the Family Income Policy Works
A family income policy is term life insurance, meaning the policy lasts for a specific time. If the policyholder passes away while the policy is active, the death benefit kicks in and sends beneficiaries monthly payments for a set period.
Family income policies are term life insurance in which the monetary value of the death benefit diminishes over time. As with all kinds of decreasing term life insurance, how long the monthly payments last depends on when the policyholder dies. Therefore, deciding how long the term lasts and the monthly payment amount is critical when purchasing a family income policy.
Because a family income policy creates monthly revenue, it can replace the income earned by the policyholder if they pass away. As a result, households with only one person earning wages may find a family income policy suitable. It’s important to calculate how much life insurance you need before setting it up.
Family Income Policy Rider Example
For example, you might purchase a family income policy that pays your beneficiaries $4,000 monthly upon your death. If you die five years after purchasing a thirty-year policy, your policy will send your beneficiaries $4,000 monthly payments for twenty-five years. However, if you die twenty-five years into the policy, your beneficiaries will receive payments for only five years.
Pros and Cons of Family Life Insurance
When looking at getting a family life insurance policy there are many things to consider to help you determine whether it is the right decision for you. You should weigh both sides of the decision carefully to know for sure that you’re making the right decision that will protect your family.
Advantages of Family Life Insurance
Family income policies have the following advantages:
- Grieving families can find dealing with huge life insurance payouts challenging, while monthly payments are easier to manage.
- Monthly payments can emulate the income a breadwinner earns, maintaining financial stability for families losing their only source of income.
- The absence of a lump sum can prevent impulsive major financial decisions.
- Beneficiaries still receive payments if the policyholder passes away later in the term.
- Your policy lasts while children grow up, then goes away once they become self-sufficient adults.
- Term life insurance tends to be cheaper than whole life insurance, saving the policyholder money annually.
Disadvantages of Family Life Insurance
Family life insurance may not be suitable for your family for the following reasons:
- The death benefit payout decreases with each successive year into the term. In other words, the longer the policyholder lives, the fewer monthly payments beneficiaries will receive.
- Since life insurance premiums depend on numerous factors, your personal circumstances, such as your health or lifestyle, could increase insurance costs. As a result, your family life insurance could be as expensive as a whole life policy while not providing life-long coverage.
- Even if your spouse or children are financially self-sufficient, a life insurance policy can defray funeral costs or pay off debt. Unfortunately, once the term expires, your life insurance coverage goes away.
Alternatives to Family Income Policies
If a death benefit of monthly payments appeals to you but decreasing term life insurance is problematic, here are two alternatives to consider:
1. Family Income Rider
Decreasing term life insurance isn’t the only insurance that can include a family income policy. You can add a family income rider to many insurance policies to ensure your family receives monthly payments if you pass away. Depending on your policy, your beneficiaries might receive monthly payments plus a lump-sum death benefit. However, family income riders usually increase life insurance premiums, so ask your life insurance company about costs.
2. Annuity Benefit
You can set up your death benefit as an annuity, which distributes monthly payments to beneficiaries. Your beneficiaries can decide whether they receive payments for a set amount of years or life. An annuity differs from a family income policy because your policy will pay out the full value whether you die a year after you purchase it or the year before it expires. In addition, because an annuity is an investment account, it has tax implications that standard life insurance doesn’t.
The Bottom Line
Life insurance is usually structured with a lump sum death benefit. This single, sizable payment helps beneficiaries financially and simplifies the process for grieving families. However, family income policies can help young families accustomed to monthly income and beneficiaries who might make unwise financial choices with a lump sum payout. In addition, since the payout decreases over time, family income policies won’t provide as much value if a policyholder passes away at an older age.
Tips for Buying Life Insurance
- Life insurance can provide peace of mind, but it should be a part of a larger financial plan. A financial advisor can help you set financial goals and pick a life insurance policy that makes sense. Finding an experienced financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Family income policies are usually term policies. However, family income riders can be attached to whole life insurance. If you’re not sure which type of life insurance is better for you, use our guide to types of life insurance.
- Life insurance premiums and payouts can be challenging to navigate. If you’re having trouble deciding on a policy, you can estimate how much life insurance you need.
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