Level Life Insurance Vs. Family Income Benefit

When taking out life insurance for a mortgage there are 3 ways life insurance can be set up to make sure the mortgage is cleared.

If it is a ‘repayment’ mortgage and the debt keeps going down, the cheapest life cover is ‘decreasing’ cover which also goes down over time.

If the mortgage is ‘interest only’ the debt does not go down and so the life cover should be ‘level’ cover which also stays the same.

Another way is to have Family Income Benefit. This pays a monthly amount of cover until the end of the term and can be used to make the mortgage payments.

It’s also possible to have ‘increasing’ cover that goes up with inflation but this is not practical for a mortgage which will either go down or stay the same.

When protecting a mortgage is makes sense to have a lump sum payment that will clear the mortgage straight away and prevent any more interest being added.

What about protecting other things like, your family?

When it comes to having life cover for the benefit of the people left behind, decreasing cover is pointless. Level Cover makes good sense as does increasing cover or Family Income Benefit.

Family Income Benefit has the potential to pay out more than a level policy.

i.e.

John is 31, and a non-smoker.

Level cover of £200,000 for 20 years could cost £10 – £11 per month.

FIB for 20 years paying £1000 per month could cost £7 – £8 per month.

If John dies in year one, that’s 20 years at £1000 per month = £240,000

That’s £40,000 more than the ‘level’ policy and it costs less.

Sounds good but…

What if John dies in year 15?

The level policy will pay out £200,000

The FIB policy will pay out £1000 per month for 5 years = £60,000

£140,000 less than the level policy.

For family protection it also makes sense to consider increasing cover that rises with inflation so that the benefit will not be eroded due to inflation.