Family income benefit is the most underused protection product in the UK, and often the most suitable for contractor families. Instead of a single lump sum on death, it pays your family a tax-free monthly income for the remainder of the policy term, replacing the income your contracting generated, in the form your household actually spends it.
You choose a monthly benefit and a term — typically running until your youngest child reaches financial independence, perhaps age 21 or 23. If you die during the term, the policy pays the monthly benefit, tax-free, from the date of death to the end of the term.
A parent who takes a £2,500-per-month policy over 20 years and dies in year five leaves the family £2,500 per month for the remaining 15 years — £450,000 in total, delivered as income. Die in year 18, and the family receives the income for the final two years. This shrinking total exposure is exactly why the premiums are so low relative to level lump-sum cover.
A well-designed family protection plan combines different types of cover to protect both your home and your family's future income. The following elements create a balanced protection strategy.
Decreasing term life insurance can be used to repay your outstanding mortgage, ensuring your family can remain in their home.
Family income benefit provides a regular tax-free monthly payment, helping to replace the income your contracting work would have provided.
Calculate your benefit around essential monthly costs such as food, utilities, childcare, education, and other day-to-day living expenses.
Take into account any income your partner could continue earning, allowing you to choose a benefit level that fills the financial gap rather than over-insuring.
Adding indexation allows your monthly benefit to increase over time, helping your family's income keep pace with rising living costs.
Writing your policy in trust helps ensure payments reach your beneficiaries quickly while remaining outside your estate for inheritance tax purposes.
Households run on monthly income, not aone-off payout. A lump sum has to be turnedinto that income by someone, at the worstpossible time, carrying real risk with it.
Converting a payout into income carries longevity and investment risk. Get the drawdown rate wrong and the money runs out while children are still dependent.
A monthly benefit matches the shape of household spending and can't be eroded by poor decisions or spent too quickly.
Family income benefit is consistently the cheapest form of family protection per pound of expected benefit. A healthy 35-year-old non-smoker might pay £12 to £20 per month for £2,500 of monthly benefit over 20 years — cover that would require roughly £500,000 of level term insurance to replicate at the start of the term, at perhaps twice the premium.
The saving comes from the decreasing total exposure: the insurer is never on risk for the full notional amount beyond day one. For budget-conscious contractor families, this efficiency means meaningful protection is affordable even alongside income protection and mortgage cover.
Limited company contractors can sometimes structure family income protection through a relevant life policy paying a lump sum, with the trust then distributing income-style payments — but a small number of insurers offer relevant life policies with a family income benefit shape directly. Where available, this combines the tax efficiency of company-paid premiums with the income-shaped payout.
The availability and structure of these options shifts across the market; we check the current position when building each contractor client's protection package and use the company-paid route wherever it produces a better net cost.
Yes — the monthly benefit is free of income tax in the beneficiaries' hands, in the same way as a lump-sum life insurance payout. Written in trust, it also sits outside your estate for inheritance tax purposes.
The family receives the monthly benefit only for the remaining term — death in year 19 of a 20-year policy pays one year of income. This is the structural trade-off that makes the cover so inexpensive. It is also why family income benefit is sized to the years of dependency rather than used for needs that persist beyond the term, which is where level cover belongs.
Most insurers offer a commutation option allowing the beneficiaries to exchange the remaining income stream for a discounted lump sum at the point of claim. The income route is usually the better value, but the flexibility exists where a capital sum is genuinely needed.
It is life insurance — just shaped as income rather than capital. The real question is which shape fits which need: decreasing lump-sum cover for the mortgage, family income benefit for ongoing household income, and level cover for needs that do not reduce. Most contractor families end up with a combination, and the combined premium is usually less than people expect.
Only if you choose an indexed policy — the benefit then escalates each year, typically with RPI or at a fixed rate, with premiums adjusting accordingly. On a policy that might pay out for fifteen or more years, indexation protects the real spending power of the benefit and is usually worth the modest extra cost.
Joint policies exist, but two single policies — one per parent, each sized to the income that parent's death would remove — usually provide better protection for a similar combined premium, and both can pay out if both parents die within the term. We price the structures side by side for every family.