Risk Clinic: FIB on critical illness

I have a client making a claim on a critical illness (CI) policy. The provider is suggesting they take a lump sum payment rather than the family income benefit (FIB) they originally bought. I realise there are various arguments for each side, but what would be the one that swings it toward FIB?

  Alan Lakey

  Highclere Financial Services

Critical illness cover within a family income benefit plan is relatively uncommon. Few providers offer it and even fewer advisers recommend it.

So within this scenario, choosing FIB suggests that the matter was considered carefully by both adviser and client, and that the plan was selected precisely because an income was more desirable than a capital sum.

Of course, circumstances may have changed and commuting to a lump sum may now be advantageous, particularly if a mortgage or debt exists that cannot otherwise be repaid.

However, it is quite wrong for the provider to recommend a lump sum as opposed to a regular income because it cannot know the client’s circumstances or predilections.

Commutation is clearly in the provider’s interest, as it reduces their administration costs and draws a line under the claim, but this circumstance is of no interest to client or adviser.

It is one thing to advise that commutation is available and quite another to actively suggest it. In fact, this amounts to the provision of financial advice and may not be lawful.

One of the reasons for family income benefit, rather than level term, is the discipline that a continuing income imposes on the client.

It is easy for a lump sum to be frittered away, thereby thwarting the intended outcome.

In short, the client should discuss the two options with his adviser to settler on the best course.