A family income rider in life insurance is an extra feature that provides a monthly income to your family if you die while the rider is active. This life insurance rider is an add-on to a life insurance policy.
Most life insurance death benefits are paid in a lump sum. But if you’re concerned that your survivors may have difficulty managing a large amount of money in the long term, you could opt for a family income rider so that benefits are disbursed in monthly installments.
How does a family income rider work?
You can often include a family income rider to your term life policy at very little cost — or even no extra cost. This is because if you die during the term, your insurance company will probably have to pay a death benefit. But if the insurer hangs onto part of the death benefit and makes the payout gradually, the company can still earn interest on some of the money for a while.
The term of a family income rider begins when you add the feature to your policy. For example, if you included a 15-year family income rider on your policy and died 10 years later, your beneficiaries would receive income for the remaining five years. Usually, your family would receive a specified portion of the death benefit each month. At the end of the term, any remaining death benefit is paid in a lump sum.
Some carriers only offer a family income rider as decreasing term life insurance, which means the total value of the death benefit gradually drops throughout the policy’s term.
Like other life insurance death benefits, money your survivors receive through a family income rider generally isn’t subject to income tax. However, any interest earned from the death benefit is considered taxable and needs to be reported to the IRS.
Learn more about life insurance riders
Source: nerdwallet.com