Lump Sum versus Family Income Benefit

In addition to the different types of life insurance on offer, you should also consider the type of pay-out you would like. You can choose to leave your survivors a lump sum or a series of regular pay-outs after your death. The lump sum will pay an agreed amount of cash out when you die. This is a flexible option, because the amount paid to your survivors can be invested, saved or spent as they wish. If you are covered by term insurance, the lump sum will be the same amount whether it is paid out at the beginning or end of the term. If the insurance is a whole-of-life or endowment policy, the final lump sum paid out may depend on the specific type of policy you have and the performance of any investment element.

Alternatively, Family Income Benefit (FIB) pays a series of regular sums to your survivors. When combined with term insurance, FIB will usually pay out for the remaining period of the agreed term. For instance, if you take out a ten year policy and die within four years of this, your family would receive six years worth of the regular FIB payment. As the potential pay-out that the insurance company must make decreases each year of the term that you do not die, and therefore the risk for the insurance company is reduced, this type of pay-out often reduces the cost of term insurance premiums. In the case of a whole-of-life policy, the length of the pay-out would be agreed on when you take out the insurance.

FIB is useful when your dependents will only be financially dependent on you for a specific period after your death, or if they do not have enough financial management experience to cope with a large lump sum. Some policies will even offer to increase the income benefit by two or five percent each year, to allow for inflation increases over time.