What is Family Protection Insurance?

By Gemma Stanbury

Following the credit crunch, you and your family may perhaps already be struggling with the rising costs of living. It has brought home to many people, what dire straits the family could be in if either a husband or his spouse should die and the source of income was suddenly removed. Family protection insurance offers a measure of financial security if the worst should happen.

Family protection insurance takes the form of term life insurance to cover the untimely death of one or both of the family breadwinners or sources of family support. As term life insurance, it can be arranged for the number of years considered most appropriate by the policy holder (the date when the children might have left the nest, for example, or a retirement date if the protection is sought for a surviving spouse).

The level of cover required will, of course, depend on the particular needs and circumstances of the family in question. This is usually arrived at by striking a balance between the monthly premiums that can afforded and the lump sum payout needed to allow the surviving family members to continue to enjoy the standard of living to which they have grown accustomed.

Indeed, because most term life insurance provides for the payment of a lump sum benefit in the event of the policy holder's death, and because this sum would then need to be invested to provide a regular replacement income, some term life insurance policies are available that pay out a regular monthly income. These are known as family income benefit policies, which, in the event of the policy holder's death, make monthly, tax-free payments of benefit from the date of the claim until the end of the insured's term life insurance that had been agreed.

From the insurer's point of view a decreasing level of benefits becomes payable with each succeeding year of the insurance term. For this reason, the premiums for family income benefit insurance can prove cheaper than standard level term life insurance (which pays out the same fixed lump sum at whatever stage during the insurance term the policy holder should die). From the beneficiaries' point of view, of course, there is the advantage of a regular income, without the worry of making potentially complicated decisions about the best investments to make.

Family protection insurance should not be confused with the similar sounding income payment protection insurance. The latter also provides for the payment of a regular, monthly replacement income, but in the case, in the event that the policy holder is incapacitated from working because of an accident or ill-health or because he or she has become involuntarily unemployed. Although this type of insurance can play an important role in protecting the income available to a family for a temporary period, it is important to bear in mind that the vast majority of such policies have a maximum payout period of no longer than 24 months.

Financial security and peace of mind for your family, therefore, more properly come through family protection insurance in the form of family income benefit.

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