Life insurance as a tried-and-tested pension model
No-one wants to think about their own death. But when the breadwinner in a family or partnership passes away, not only are the survivors left to grieve, they often have to face the financial – as well as the existential – consequences of his or her death.
Parents and grandparents in particular want to secure the future of their families in the best way possible. Possible solutions include insurance policies – which are specifically designed with this purpose in mind – offering tax advantages and consolidating the financial future of family members.
A wide variety of products
Life insurance policies offer solutions that vary according to the product. Traditional policies can generally be divided into two categories: fixed-term policies (in the event of death) and mixed policies (in the event of death and survival).
Fixed-term or temporary insurance policies provide financial security for family members, regardless of whether the insured amount is constant or decreasing over the policy period. If the policyholder dies during the policy term, the sum will be paid out to the survivors, or alternatively to the contractually stipulated beneficiaries.
A very common form of fixed-term policies is credit protection insurance. This is an unfunded, temporary form of insurance that covers the residual amount of a mortgage still to be repaid. When buying a home, taking out credit protection insurance is essential. Otherwise, upon the death of a parent, the family may no longer be in a position repay the loan leaving the property having to be sold. This type of insurance is also particularly important if a spouse stops working or reduces working hours in order to devote more time to raising children. If the main wage earner dies, in most cases the partner would not be able to maintain the same standard of living without insurance cover.
The principles of credit protection insurance
The following principles apply when taking out credit protection insurance: In the event of death, the insurance company guarantees payment of the capital still owed to the bank. The customer decides how much capital is to be insured and the policy term. The calculation of the premium is based on the age of the policyholder, the policy term and the insured capital. With most insurance companies, additional benefits can also be included in a policy (disability, accident, etc.).
Unlike credit protection insurance, fixed-term life insurance usually refers to a principal amount that is fixed and constant over the policy period.
Unlike credit protection insurance (where the insured capital decreases), fixed-term life insurance usually refers to a principal amount that is fixed and constant over the policy period. Beneficiaries receive the capital if the policyholder dies before the end of the policy period. Here too, clear principles apply: the policyholder determines the sum and the policy period. They also determine the frequency of payments, with the choice between a single premium or regular payments. The calculation of the premium is based on the age of the policyholder, the policy term and the insured capital. The policyholder may request the total surrender of the policy or suspend it at any time by means of an amendment, i.e. stop paying the premiums (with no tax implications). With most insurance companies it is possible to add on additional benefits (disability, accident, etc.). There are also insurance companies that offer an assistance service that survivors can call on if there are problems, e.g. in the event of a death abroad.
In the case of mixed life insurance policies providing both survival and death benefits, the benefits are combined. In the event of survival, the benefits guarantee the payment of capital at the end of the policy period, including any property participations. If the policyholder dies before the end of the policy period, the beneficiary(ies) receive the agreed capital payment. Again, most companies provide for additional insurance benefits (disability, accident, etc.).
Life insurance not only provides family members with financial security it also offers tax benefits.
Life insurance not only provides family members with financial security, it also offers tax advantages. For example, taxpayers resident in Luxembourg are subject to certain tax deductions (see table) when they take out an insurance policy. It’s worth noting that the deductibles for these insurance policies cannot not be cumulated with the thresholds for debt interest on personal loans.
|MAXIMUM DEDUCTIBLE AMOUNTS FOR PREMIUMS AND CONTRIBUTIONS|
|Childless||EUR 672||EUR 1,344|
|with 1 child||EUR 1,344||EUR 2,016|
|with 2 child||EUR 2,016||EUR 2,688|
|EUR 672 for each further child|