My client pays monthly child benefits for his three children that live with their mother and he also has a mortgage of his own. He is claiming on a critical illness (CI) policy and is eligible for a pay-out. What are the considerations for taking the family income benefit he originally signed up for or taking the pay-out as a lump sum?
Holly Ewing, key account manager, Ageas Protect
Without knowing the rationale for the way the policy was set up, it is difficult to understand the target outcome. However there are two considerations.
Firstly, strategic consideration based on what kind of vision the client has with a focused and disciplined approach.
While commuting the payment to pay off the mortgage is possible and may seem appealing, the client must consider paying the monthly child benefits and consider why the policy was set up in this manner in the first place.
Receiving the pay-out as a lump sum could result in the money being used for extravagant pursuits whereas a guaranteed income provides stability for the term required.
Should the client wish to take the pay-out as a lump sum, there will be great responsibility to ensure it is efficiently invested to produce the income required. In the current low interest environment this will be a considerable task likely to require taking higher levels of risk.
The second consideration is fiscal. It requires the client - or more likely an adviser - to possess some awareness of investment market behaviour and model the impact of long-term inflation and investment returns on the lump sum payment versus the regular income.
In terms of fiscal metrics the client must consider the hard cost of receiving the pay-out as a lump sum. While lower administration costs mean many providers would wish a FIB policy to be commuted, taking into account prevailing interest rates this will generally equate to a lower amount than receiving as a regular income.
Nick Aumonier, managing director, Clarity Financial Solutions
The client's child benefit arrangements are unaffected by his CI claim or subsequent payout as the Child Support Agency is only interested in taxable income; he will need to maintain these assuming he continues to work. The FIB can fund his mortgage payments and other essential outgoings, however if he were still working this may not be necessary and the lump sum could clear his mortgage.
In rare circumstances, the mother of his children can apply for a ‘Variation'; essentially a claim for part of the payout. However the payout would need to be in excess of £65,000 and success of such claims are limited.
The question is what he intends to use the funds for. To replace income, then FIB is best. If it is for immediate use, such as clearing the mortgage or holidays, then the lump sum works.
It also boils down to what he can get if he chooses to commute from the monthly payment to the lump sum. Will that pot be enough to do what he wants? Life offices report that a surprisingly high number of claimants do indeed chose to take the lump sum, even though over time it is less than they would have received overall if taken on the ‘drip'. FIB is still a largely undersold and therefore misunderstood product which is often perfect for situations like this.
I would also be advising the client to look into additional cover to ensure the children continue to be supported should he pass away.
Michael Aldridge, sales director, London and Country
It appears the client has the hybrid product Family Income Benefit / Critical Illness policy (FIB CIC) and not a standard CI policy, where they would not be given the option to take the pay-out as an income.
Assuming this is the case then while it may appeal to take a lump sum this could be to the detriment of the overall amount paid.
In addition the advantage of taking any pay-out as an income is the ease of management when covering any regular commitments, such as the mortgage and child maintenance payments.
The nature of the illness will have a direct bearing on any decision.
Should the client have a condition where any recovery period is likely to be relatively quick then taking a lump sum may have a greater appeal. It is more likely they could return to work to cover the standard outgoings, having used the lump sum to perhaps pay off part or all of the outstanding debts and cover commitments short-term.
If however the illness is of a more serious, chronic or degenerative nature then the pendulum swings back to considering income to cover the commitments over the likely extended period of time. It is important to note if the condition resulted in the client passing away the insurer would invariably continue to make payment into the estate.
Other considerations are of course the age of the children, term of the mortgage and any other policies, savings or benefits the client may have or be in receipt of.
