What is a Family Income Rider? A Guide for Life Insurance Policyholders

What Is a Family Income Rider?

A family income rider allows your term life insurance policy’s death benefit to be distributed in monthly installments rather than as a lump sum. This optional add-on provides monthly payments for a specified duration, after which your insurer may pay out your policy’s remaining death benefit as a lump sum, depending on the terms of your policy.

A family income rider ensures the beneficiary receives regular payments over a long period of time, often replacing the insured’s income if they pass away unexpectedly. Many grieving families find regular monthly payments easier to manage over time.

On the other hand, some insurers only offer these riders as decreasing term life insurance. In these cases, the total death benefit payout would decrease until the insured passes away.

How Are Death Benefits Distributed?

Typically, a life insurance policy’s death benefit is paid as a large lump sum, which can make financial management challenging for many beneficiaries. A family income rider defers the lump sum payment and distributes an additional benefit via monthly payments in the meantime. This simplifies financial management for the beneficiary and ensures they receive consistent support following the insured’s passing.

How Do Family Income Riders Work?

This type of rider ensures your beneficiary receives a steady flow of income — a smart choice for policyholders who are the primary earners for their families. Many family income policies are a type of decreasing term life insurance, which means the death benefit decreases as the term progresses.

What Makes Family Income Riders Unique?

Unlike other types of life insurance, these riders distribute a death benefit as a consistent income stream. A family income rider typically makes monthly payments based on a particular percentage of the life insurance policy’s face value.

For example, say you purchase a 25-year, $600,000 life insurance policy with a family income rider that pays 1% of the policy’s face value each month. If you pass away 10 years later, your rider should pay 1% of your policy’s face value — or $6,000 — monthly for the next 15 years until your term ends. Depending on your policy and insurance provider, your beneficiary may also receive a lump sum payout after your policy’s term ends.

Who Can Get a Family Income Rider?

Eligibility criteria for this type of rider vary depending on your insurer and policy, but requirements typically include the following:

• Age minimum and maximum (e.g., 18 and 65, respectively)
• Minimum and maximum policy term (e.g., 5 and 52 years, respectively)
• Minimum and maximum assured sum (e.g., $50,000 and $5,000,000, respectively)

These riders typically serve people who are the primary earners in their families. Though not a requirement, policyholders for these riders often have families who are dependent on their income.

How Does Timing Affect the Death Benefit?

Many family income policies are a type of decreasing term life insurance, meaning the death benefit decreases in value the longer the policyholder is alive. Again, consider a 25-year, $600,000 life insurance policy with a family income rider that pays 1% of your policy’s face value monthly.

If you pass away with 15 years left on your policy, your beneficiaries will receive $6,000 per month for 15 years, totaling $4.68 million. But if you pass away with only 5 years left, your rider would pay out $1.56 million in total. Some policies might still pay out a lump sum after the payouts end, but many do not.

What Types of Life Insurance Offer a Family Income Rider?

Generally, family income riders are added to term life insurance policies. Most types of permanent life insurance, including universal and variable policies, do not allow you to add this type of rider.

Term Life Insurance

Most family income riders are add-ons to term life insurance policies. Family income is itself a type of term life insurance since the policy lasts for a set amount of time. In other words, a family income rider comes with a set term, which usually ranges from 5 years to 50 or more. 

Whole Life Insurance

Say you live past your term life insurance policy and still want coverage. You might then opt for a whole life insurance policy, which would last for the rest of your life. Depending on your insurer, you might be able to add this type of rider to your whole policy, but it’s not typically an option.

Universal Life Insurance

Like whole life insurance, universal is a type of permanent life insurance that provides lifetime coverage. Many insurers allow you to add riders to a whole life insurance policy, but they rarely offer a family income rider.

Variable Life Insurance

With a variable life insurance policy, you decide how to invest the policy’s cash value, meaning its value may fluctuate depending on how the investments perform. Variable policies are another form of permanent life insurance, and many insurers offer them as a type of universal life insurance. Most variable policies do not allow for a family income rider.

How Much Does a Family Income Rider Cost?

Insurers often allow you to add this type of rider to your term life insurance policy for little or no extra cost. This rider defers the payment of your policy’s lump sum death benefit, allowing more time for that money to accrue interest for the insurance company.

Should You Get a Family Income Rider?

This kind of rider may be a smart idea if you’re your family’s sole or primary breadwinner and you would want your death benefit to mimic your income.

Consider This Rider If…

• You are the primary income earner for your beneficiaries.
• You want to ensure a monthly income for your life insurance policy’s beneficiaries after you pass away.
• Your beneficiaries include young children who would benefit from a steady stream of income while they grow up.
• It would be easier for your beneficiaries to manage monthly payments than one large lump sum payment.

Advantages

• Ease of monthly payments: With a family income rider, your policy’s death benefit mimics an earner’s income stream. If you are your family’s primary breadwinner, your beneficiaries may have an easier time receiving monthly payments to replace your income than a single large lump sum payment.
• Flexible death benefit distribution: Most riders of this kind stipulate that the beneficiary accepts the rider within a certain time frame. Your beneficiary may decline to activate the rider if they would prefer a lump sum payment rather than monthly installments.
• Long-term comfort: This rider can ensure a long-term safety net for a family with growing children until the children reach adulthood.
• Free or low cost: You can usually add a family income rider for only a small additional cost, and some insurers offer it for free.
• No income taxes: Whether your beneficiaries chose the monthly payouts or lump sum, they should not have to pay income tax on the death benefit. 

Disadvantages

• Decreases in value: The cash value of a family income policy decreases the longer the insured lives. If you live long into the term of your family income rider, your beneficiaries may receive a smaller benefit.
• Non-permanent: Family income policies are a form of term life insurance, meaning they are not lifelong. If you outlive the term of your policy, your beneficiaries may not receive any payout. Permanent life insurance policies, on the other hand, do not expire.

How To Get a Family Income Rider

It should be fairly simple to add a family income rider if your insurance company offers it.

1. Verify eligibility. Make sure you and your policy are eligible for this kind of rider according to your insurer’s guidelines. Some insurers only allow you to add term riders to term life insurance policies during the initial application process. Others might allow you to add a rider after the fact.
2. Weigh the pros and cons. Consider the potential costs and benefits of adding this rider to ensure it’s a worthwhile addition.
3. Talk to an expert. If you have any questions, consult with a financial advisor for an expert opinion on whether this kind of rider is a good choice for you and your beneficiaries.
4. Request the rider. Contact a representative from your insurance company to request the addition to your policy.

Annuities: A Possible Alternative 

This type of rider may not be right for everyone. Many family income riders come on decreasing term life insurance policies, which means your beneficiaries will receive a smaller death benefit if you pass away late in to the policy’s term. 

Setting up your death benefit as an annuity can help you avoid the pitfalls associated with a family income rider. Like a family income policy, an annuity provides the death benefit in monthly installments rather than as a lump sum. However, annuities pay out the policy’s full cash value regardless of when the insured dies — the death benefit does not shrink over time.

Conversely, an annuity is an investment account, meaning your beneficiaries may have to pay income taxes on their payouts. 

Putting It All Together

A family income rider provides a term life insurance policy’s death benefit in the form of monthly installments. If you are the sole or primary breadwinner for your family, adding this type of rider can structure your benefit so it effectively replaces your income if you pass away within the term of your policy.

Receiving a large, lump-sum benefit can be stressful and difficult to manage for a grieving family. A family income rider can help alleviate that stress. However, many family income policies come with decreasing terms, meaning your benefit amount may shrink over time while it remains active and unused.