What is a Family Income Rider?
A family income rider is an optional add-on to a life insurance policy that stipulates that all or a portion of the death benefit should be distributed in monthly installments rather than as a lump sum.
How family income riders operate
Life insurance policies provide for the loved ones an insured leaves behind. Their benefits are usually paid in a lump sum, but that can make financial management a challenge. People who want to ensure that their death benefit provides for their loved ones long-term may want the money to be distributed in smaller amounts over time.
Enter: family income riders. If the policy owner chooses to add this option and their beneficiary chooses to exercise it, the lump sum payment from their life insurance policy is deferred. In the interim, the family income rider distributes a portion of the policy’s face value (e.g., 1%) to the beneficiary on a monthly basis.
This ensures a steady stream of money, replacing the insured’s income and making it easier for the beneficiary to budget over time.
The timeline for family income riders
When the policy owner adds a family income rider, the timeline for it begins. If they choose a family income rider that lasts 20 years, then pass away 10 years later, for example, the rider will be in effect for the remaining decade. That’s not to say that the beneficiary will receive less. At the end of the rider’s term, the insurer will pay out the remaining death benefit in a lump sum.
There’s another timetable to consider for family income riders. Most come with a specification that the beneficiary must activate the rider within a certain time period. If they don’t, the insurer will pay out the death benefit as a lump sum.
Family income rider costs
Generally, adding a family income rider costs very little, if anything at all. That’s because while the insurer holds the money to distribute it periodically, they’re able to earn interest on it. This helps to offset any administrative costs, making family income riders affordable for policy owners.