FAMILY INCOME BENEFIT (FIB) is probably the most cost-effective and simple method of putting protect...
FAMILY INCOME BENEFIT (FIB) is probably the most cost-effective and simple method of putting protection in place for a clients' family. Yet despite this, it remains one of the least sold, accounting for only 2.1% of all term assurance sales, according to ERC Frankona.
Written as decreasing term assurance, family income benefit is designed to meet the day-to-day costs of running a family on the death of the breadwinner by paying a quarterly tax-free income rather than a lump sum. Like traditional decreasing term, the sum assured reduces proportionally over the length of the term, but the beneficiaries will only receive the income payments for the remaining years of the policy term.
In recent years some companies have written their critical illness contracts as family income benefit, whereby an income rather than a lump sum is paid on the insured life suffering a critical illness. Scottish Provident was the first to develop the product in 1996, quickly followed by Swiss Life, Standard Life, Zurich Life and Tunbridge Wells Equitable Friendly Society.
During the 1980s when term prices were high, FIB was considerably more popular than it is today, but when AIDS loadings on term products were removed and competition in the market increased, term premiums tumbled and FIB began to lose out to level term assurance. Despite low sales, providers are confident that the product is not yet dead and buried.
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Turnaround.
While sales of the product have fallen quite sharply over the last decade, CIS has noticed a turnaround with sales rising 24% so far this year. A reason for this, says Russ Brady, CIS communications manager, is low interest rates.
He remarks: "With investment yields being so low in a low interest rate environment it is much harder to turn a lump sum into an investment yielding vehicle and advisers are increasingly recognising this.
Roger Edwards, protection product marketing manager at Scottish Provident, says that uptake of the benefit has increased since the contract has been applied to critical illness, making it a more attractive and marketable product.
"Once a critical illness has triggered the claim then the income is paid for the rest of the term, unlike income protection where benefits will cease when the insured recovers and returns to work," he says.
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Limitations.
But while the product may have seen a slight upturn in popularity, sales are by no means going through the roof. Colin Ledlie, assistant general manager in marketing at Standard Life, suggests that one reason why sales remain low is that despite the low cost there are limitations on the benefit.
He says: "The income provided is much less flexible than a lump sum as there are more restrictions on how it can be used. For example, it is not good for protecting loans, which is a reason why many term products are taken out.
While most contracts offer a facility to commute the payments into a lump sum benefit, a commuted value will be less than the original sum assured. However, while this might appear to undermine the ethos of the product, Edwards says that it has been a popular option, particularly if the claim is made in the early years of the term when the sum assured has not lost too much of its initial value.
He says: "Even though the value may be less than the initial sum assured customers are still getting good value for money as the protection was bought at a much lower cost than a lump sum.
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Less expensive.
In some instances FIB can be more than 50% cheaper. As a result, it can be a good alternative for a client that finds the cost of a life and critical illness plan too high. Where claims are made early into the term the insured or their family in the event of death will receive most of the initial sum assured, whether in income or in a commuted lump sum. In the event of later claims, it is less likely a large lump sum will be needed as the income can help see the insured through to retirement when the pension kicks in.
The key to selling the product is targeting, says John Ravenscroft, protection market director at ZIFA.
He remarks: "Family income benefit is a great form of protection for young families as it can save them a considerable amount of worry over deciding where and how to invest a lump sum. FIB, on the other hand, covers the day to day living costs giving them immediate security.
While many IFAs are trying to push more comprehensive and wider ranging packages that include elements of critical illness and income protection on top of life cover, FIB does have a role to play in families where cost is an issue or for the more cautious, says Brady.
"The product has obvious appeal to couples on fairly tight budgets, but as the income is known in advance it will also appeal to inexperienced investors who would have to take out a lump sum amount under a level term assurance plan and then reinvest to derive an income," he says. "It is one thing to have £200,000, but another to turn it into an income.
For example there may be onward tax issues that need to be considered, and in a time of bereavement this is one worry a family can do without.
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Expense link.
Edwards says that the key to selling FIB is through linking the benefit to a particular expense that could not be met if the breadwinner died. For example it is an extremely cost-effective way of insuring a spouse.
"People are aware that they need to protect the breadwinner, but what happens if the spouse dies? FIB can be used to insure the cost of a nanny.
Other uses could include school fees cover or child maintenance protection after a divorce. As a result, to sell the product IFAs do not need to target new clients but can go back to their existing client base and put some low-cost, effective cover in place. Because the product does protect a specific need it sits well with other products that may already be in place, according to Ravenscroft.
"Family income benefit is very powerful in conjunction with a death in service lump sum. This way the family can pay off the loan and invest the difference and although this will generate an income there will still be an earnings gap that family income benefit can plug.
Brady agrees, and it is for this reason he argues why the product should not just be offered to families on a budget.
He says: "The product does have a place for families with higher incomes who already have separate cover in place for their mortgage but want something to help their children.
Edwards also says that FIB can complement income protection, for example in protecting school fees. This way a large and important expense can be protected from a range of possibilities.
"If life and critical illness FIB is combined with income protection the fees are paid if you die, if you are ill or sick over a long period.
Rachel Williams is staff writer.
