Family Income Benefit Calculator United Kingdom

What the family income benefit calculator does

The calculator values a life policy that pays your dependants a regular annual income if you die, rather than a lump sum. It answers two questions: how much would the policy pay in total over its remaining term, and what is that stream of payments worth today, given that money received years from now is worth less than money now?

Enter the yearly benefit, the number of years left on the policy and a discount rate. The tool returns the total payout and the present value of the cover, so you can judge whether a policy gives enough protection and compare income-style cover with a lump sum on a fair basis.

What family income benefit is

Family income benefit is a term life policy that pays out as an income. After a claim, it pays a set amount each year, usually tax-free, until the end of the original term. A policy set up to run until the children finish education pays for the years remaining at the time of the claim, not the full original term.

Because the total it could pay falls as the term runs down, the insurer’s maximum liability shrinks over time, which usually makes this cover cheaper than an equivalent lump sum policy. A predictable income can also be easier for a family to manage than a large sum that has to be invested well to produce the same result. The drawback is that there is no capital sum for one-off needs.

Why present value matters

The annual benefit times the years remaining overstates what the cover is worth. A payment due in fifteen years is worth less now than the same payment today, because of inflation and the return you could earn in the meantime, so ignoring this makes long cover look more valuable than it is.

The present value discounts each future payment back to today at your chosen rate and adds them up. That single figure is the fairer one to compare with a lump sum policy or with your family’s actual needs, because a lump sum is already in today’s money.

Reading your result

The calculator returns three figures. The total undiscounted payout is the simple sum of every future payment. The present value of cover is what that income stream is worth today, and is the main figure to rely on. The annual benefit is shown again for reference, since it is what your family would receive each year.

The gap between the total and the present value is the effect of discounting, and over a long term it can be large. A policy paying £25,000 a year for fifteen years pays £375,000 in total, but at a 2% discount rate it is worth about £321,000 today.

Choosing a discount rate

The discount rate is a judgement, and it has a direct effect on the result. A higher rate assumes future money is worth much less now and gives a lower present value; a lower rate does the opposite. Test a range rather than settling on one figure.

Many people use expected inflation, since a level income loses buying power as prices rise, or a cautious investment return they could reasonably earn. Trying a low and a high rate shows how sensitive the valuation is.

What you need to enter

The annual benefit is the yearly income the policy would pay your dependants. The years remaining is how long the policy would keep paying from the point of a claim; for cover linked to children or a mortgage, that is the time left until the need ends. The discount rate is your assumption for the time value of money.

If you are sizing new cover, start from your family’s needs: the income required for essential outgoings, how many years that need would last and a prudent discount rate. Then use the present value to check that the cover is neither wastefully high nor too low.

When to use this tool

Use it to review existing family income benefit cover, to compare an income policy with a lump sum alternative or to work out how much protection your dependants would need. The present value gives a like-for-like basis for those comparisons.

Protection needs change as mortgages shrink, children grow up and circumstances shift, so revisit the figures from time to time, and take regulated advice when arranging or changing a policy.

This is general information only and not financial advice.

About This Family Income Benefit Calculator

Use this family income benefit calculator to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.