What Is A Family Income Plan-Life Insurance Policy And Why Have One?

In this article I will discuss the benefits of a little known but very important plan called a family income plan which is also known as family income benefit. I will explain how the plan works and further I will go into how this type of plan can benefit the average client looking for life insurance.

First of all it is important to understand the various needs for life insurance and therefore have a greater understanding of were exactly the likes of family income plans fit within good financial planning.

There is generally only a handful of reasons one would have life insurance. The obvious ones are family protection and loans or mortgage protection. Mortgage protection or loan is quite simple you have a liability of a certain amount of money, so best advice dictates that you should insure exactly that amount in the event of death, and if funds allow in the event of a critical illness. Family income benefit does not cater for mortgage or loan protection for reasons that will be later explained.

Family protection is where family income plans fit perfectly. Family protection is all about making sure that your family or your dependents are adequately taken care of financially in the event of your death. In order to suitably meet this need you invariably have to have a figure to insure, an amount of money that your dependents would need in order to maintain their standard of living in the event that the worst actually happens.

A lot of people tend to use their incomes as a good benchmark to work from when ascertaining what level of cover they actually need. The reason for this is during life you may support your family to the tune of 25,000 for example, so it is fair to say that in the event you die they would need 25,000 per annum in order to maintain their standard of living.

Before the likes of family income plans people only had lump sum insurance plans to to take out as protection. This meant people would have to work out what size of lump sum they needed if they wanted an annual benefit of 25,000. Due to the fact tat they would never know what future inflation or investment returns would be meant this was far from an exact science and again from a good financial planning point of view was a poor and risky way to work.

Along came family income benefit. In short this plan pays out the annual required benefit. So if you wanted 30,000 per annum you took the plan out with that level of sum assured and then if the worst happens the plan pays out 30,000 per annum.

The plan went a bit further to ensure that it did the job correctly, by including something called indexation. This meant that each year the value of the benefit actually increased to ensure that if and the when the worst actually happened the amount your loved ones would receive would be the right amount regardless of how high or low inflation had been. Furthermore once claimed it would continue to rise with inflation making sure that continued to maintain that value from the benefit.

So in summary if you are looking for family protection and it is a level of income you are looking to protect, which 99% of time it really should be, then family income benefit is generally the right plan for you. It will ensure you have adequate cover to protect your family in the event of your death and it will continue into the future with inflation protection as a result of the indexation benefit available as an option within the plan.

Why Life Insurance Should Be Part of Your Estate Planning

Estate planning is about making sure you take care of your spouse and family should you pass away. Life insurance plays a critical role in assuring their comfort.

Most people view life insurance as a one dimensional tool. They know and understand its value as a means of replacing the lost income of the policy holder for a certain length of time after his death. It is a means of protecting the family and dependents from financial disaster in the case of untimely and unexpected death. Fewer people have learned of the use of Life Insurance as an investment instrument that is capable of supplementing other elements of a comprehensive retirement plan.

Even fewer people fully understand the value of life insurance in estate planning. Life Insurance is a tool that can be used to transfer wealth from one generation to the other in a manner that minimizes the amount of that wealth lost to taxes. There are several ways that this can be done and it makes your Life Insurance agent a partner in the estate planning process in the same manner he is a partner in your personal finance planning and investment planning.

The basic death benefit from an insurance policy often makes up a large portion of the estate of the deceased person. This is why the taxation implications and the selection of beneficiaries is an important element. It also illustrates how all of the various financial planning areas must be coordinated. The basic life insurance policy will play a role in both financial planning and estate planning. It also might very well figure in retirement planning.

One example of how life insurance can play a creative roll in the transfer of wealth while minimizing taxation is the use of the $10,000 tax free yearly gift allowance. It is possible to make a yearly tax free gift to a child with the intention, but not the requirement, that the money is used to pay a premium on a life insurance policy. The life insurance policy is just about the only investment vehicle where the full amount of the return is available from the first day of the investment. You can imagine how much life insurance can be purchased for a premium of $10,000 yearly. The full amount of this policy represents wealth that is protected from taxation.

There is no question that your life insurance agent can be a trusted partner in the estate planning process. The ability to transfer control of your policy to a Living Trust and the investment and taxation implications for your beneficiaries are just two examples of the kinds of estate planning questions that you will need the guidance and advice of an insurance professional to answer.

Life Insurance to Safeguard Your Future

Life insurance is a financial tool that helps protecting the interests of the family members at the event of a premature death of the bread earner of the family. Hence, if you have financially dependent family members, you may consider buying a life insurance plan.

Life insurance plan works as a risk manager, helps you to plan ahead for your future. Some life plans, along with providing the policy holder with the death benefit, also help in accumulating fund value.

Life insurance, since its inception has trudged a long way. Now life policies are available at every possible form to cater the various needs of its consumers- term life plans, universal life plans, whole life plans and so forth.

Term life policy

Term life policy can be termed as the forerunner of the life insurance industry. The term life plan offers coverage for a certain period of time against the payment of premium. The traditional term life policy only pays out the death benefit if the policy holder dies within the term of the plan.

The term life insurance can further be categorized as the following,

The level term policy: in the level term policy the coverage level and therefore the premium remains constant for the entire term of the plan.

The decreasing term life insurance: the policy coverage decreases with time. This type of plan is ideal for people with mortgage loan. The coverage limit will decrease in accordance with the outstanding loan amount.

The whole life policy

For a whole life plan the coverage continues for the lifetime of the policy holder, i.e. as long as the policy holder continues paying the premium the coverage will continue. The premium level, however, is subjected to stay the same for the traditional whole life plan. The whole life policy is priced higher than the term life plan because of its advantageous features.

How to determine the amount of coverage you need?

It’s important to determine the coverage level that you need before shopping for the life insurance. At the outset if you have a family dependent on your income, or have kids to care for, you need life insurance. However, that doesn’t imply that life insurance isn’t an option for a single individual. A life policy can help in creating substantial saving for the funeral expenses as well.

Here is a formula that might help you in determining the coverage level you need.

  • Multiply your income with the number of years you’re planning to work.
  • Add to it unexpected expenses, like- huge medical bills, to obtain the final figure.
  • Incorporate the inflation factor into your calculation.
  • Include the additional income that the family might lose at the event of your untimely death.
  • You must not miss adding the funeral expenses and the estate taxes while calculating the coverage need.

A figure thus obtained can give you a fair idea about the level of the coverage that may cover all the losses of your family, apart from the emotional loss, if you don’t live long enough to take care of them.