Family Income Rider: What It Is, How It Works

What Is a Family Income Rider?

A family income rider is an addition to a life insurance policy that provides the beneficiary with an amount of money equal to the policyholder's monthly income in the event the policyholder dies. The rider is a type of death benefit. It specifies the term for the additional coverage and eventually expires if it's not activated by the death of the insured.

How a Family Income Rider Works

Life insurance benefits are usually paid out to beneficiaries in a one-time, lump-sum death benefit. However, some life insurance policyholders may have concerns about their beneficiaries' ability to properly manage a lump-sum payment. In such cases, they may elect to add a family income rider to provide additional monies in installments.

Based on the size of the death benefit or the number of months a policyholder would like their beneficiaries to receive payments, a policyholder can determine the distribution plan that works best for their family. In some cases, the beneficiary of a family income rider may choose to receive a lump sum rather than monthly payments.

The rider on the life insurance is generally used by individuals who are the sole earning members of their family. Income is paid out in installments in addition to a lump-sum death benefit, which beneficiaries receive at the end of the family income rider period. With a family income benefit rider, you can specify the amount of time that you would like your family to receive this monthly income. Younger wage earners will typically choose a longer period of time for coverage because they have more working years left before retirement, and their early death would cause a larger financial hardship to their families.

Like a term life insurance policy, which exists for a set period of time, the years that a family income rider is in effect starts counting down as the policyholder ages and eventually expires altogether if they don't die in the interim.

Special Considerations

Family income riders are designed with a growing family in mind. If a policyholder is currently raising a family, or faces the financial responsibility associated with the care of others, a family income rider may be a great choice.

One thing to remember in the case of family income riders is that they must be claimed within a certain period of time or else they may expire. The time period for claiming a family income rider is generally specified within the terms of a policy. Also, be mindful of federal regulation may impact payment of life insurance proceeds if distributed after the recipient's death.

Family Income Rider Example

Consider a father who decides to purchase a 20-year, $500,000 life insurance policy with a family income rider. After five years, the father passes away. His death triggers the death benefit for the wife, who then receives a regular monthly payment for the next 15 years, as stipulated by the family income rider. The monthly payment is usually a certain percentage of the face value of the policy.

It might pay 1% of the face value every month, for example—in this case, $5,000. In addition, at the end of the 20-year term, the wife would also receive the $500,000 lump-sum payment.

The Bottom Line

A family income rider is an insurance policy add-on that provides an additional benefit to the policyholder's beneficiaries in the event of their death. This rider is designed to provide a regular stream of income to the policyholder's family, typically for a specified period of time. Adding a rider will often increase your premium, though it will extend the coverage of your standard policy.