Life insurance - what you need to consider
Providing financial security for your family, saving for your old age, or both at once - with a life insurance policy, all this is possible. But which is the right one in your situation? And is it even worth it? It's not always easy to keep track of all the different options. We explain when you need life insurance and which policies you can safely do without.
when should you think about a life insurance policy?
For families, the death of a parent or partner often brings financial uncertainty in addition to emotional pain. At least you can protect your loved ones from the latter.
A term life insurance catches your dependents financially, if you should die suddenly. Therefore, it is especially useful if your family is heavily dependent on your income.
As a homeowner with a current home loan, you should also have a life insurance policy. Because if you die, the home loan may be at risk if your survivors can't afford the financing installment on their own. In the worst case, your family will no longer be able to keep the property and will have to move out of your home.
Correctly estimate term and sum insured
If the insured person dies, the insurance company pays a pre-agreed sum to the beneficiaries - but only if the death also occurred during the term of the contract.
As a general rule, the longer the contract runs, the more expensive it is.
Nevertheless, term life, as the contract is colloquially known, should run at least until the house loan is paid off or the children are old enough to take care of themselves financially. If you can afford it, you should even let the contract run a few years longer. This gives you a time buffer in case something in your life doesn't go as planned financially.
How high the sum insured should be depends on your personal circumstances. What is your family situation like? Have you already put money aside? What is your partner's income? Is it realistic that your partner will continue to work full time and take care of your children if something happens to you?
You should definitely think about these questions when determining a possible sum insured. Of course, the premium also plays a role. For example, you can start with a sum insured of $150,000. If, on the other hand, you want to insure a real estate loan, you should consider the amount and term of the loan.
An unhealthy lifestyle costs
How much a term life insurance will cost you depends on how long the contract runs and how high the sum insured is. Another cost driver is your state of health. If you suffer from obesity or high blood pressure, this will increase the amount insured. Smoking is particularly expensive for most providers. Statistically, an unhealthy lifestyle leads to death more quickly. For the insurer, this increases the risk that you will die during the term of the contract and that he will have to pay. And you pay for this risk accordingly.
The insurer will also charge you for extreme sports or dangerous hobbies such as skydiving. The same applies if you have recently been seriously ill. Even then, you will not have an easy time getting life insurance.
Each insurance company decides for itself how these so-called risk factors are weighted. Some, for example, only apply a surcharge in the case of very high obesity.
What can life insurance do?
Classic life insurance, also known as life insurance, combines a long-term savings contract and survivor protection. What used to be considered a popular and high-interest investment is not very attractive today: too expensive, too low interest rates, too intransparent.
In practice, pure life insurance policies are becoming increasingly rare anyway. Nowadays, insurance brokers tend to promote private annuities, where customers can choose a lifelong annuity at the end of the savings period instead of a payout of the entire balance.
How endowment life insurance works
As a rule, you pay monthly or annually into the endowment life insurance policy - over decades. The insurer sets aside a portion of this premium for death benefits, and another portion is used to cover costs. The insurance company then invests the rest. For traditional life insurance, a fixed interest rate applies, known as the maximum actuarial interest rate. This is set by the legislature on an annual basis.
At present, providers guarantee an interest rate of 0.9 percent on the savings portion. If the insurance company invests your payments wisely, you can expect additional surpluses.
At the end of the contract, you receive the interest-bearing sum together with the surpluses. If you die before then, the insurance sum goes to your surviving dependents.
Often unattractive for providers and customers
The persistently low interest rates make it difficult for providers to invest policyholders' money profitably. As a result, many are now exiting the life insurance business and only offering policies without guaranteed interest rates. Index policies are one example of this.
Many customers also consider terminating their policies because their life insurance is not yielding the desired return or is too expensive in the long term. However, if you terminate your policy, you lose a lot of money. The provider only pays back the current surrender value. This does not come close to the sum accumulated by the premiums paid in. A better way is to sell the life insurance policy. The buyer usually pays the surrender value plus a premium of 2 to 4 percent on average.
If you are unable to pay your premiums but want to keep the money in the policy, you can also defer the premium on the life insurance policy. In the short term, this can help to bridge financial bottlenecks.
Is a traditional pension insurance worthwhile?
The classic annuity insurance is, so to speak, an extension of the classic life insurance: The insurer does not pay out your saved money in one fell swoop, but as a lifelong annuity. This makes private pension insurance seem like a sensible supplement to the statutory pension.
In fact, however, this type of private pension is only worthwhile if you live to an above-average age.
Pension payments generally end upon death. Some contracts also provide for a guaranteed annuity period, during which part of the money saved is paid out to surviving dependents. Nevertheless, part of the saved capital is then "forfeited".
The situation is different if you get very old. Then you get more money as pension than you have saved before. However, because this is a rare occurrence, it is advisable to opt for cheaper and better alternatives such as index funds.
First you save and then you pay
Private pension insurance consists of two phases: the savings phase and the pension phase. In the first phase, the insurance company saves part of your monthly or annual contributions and pays interest on them. As with traditional life insurance, the insurance company only guarantees an interest rate of currently 0.9 percent. At best, you can still count on an excess bonus. At the beginning of the pension phase, the provider pays you the interest-bearing sum. As a rule, you can choose whether you would like to have the entire amount paid out at once or whether you would prefer a constant monthly pension for life.
You have the choice: immediately starting or deferred annuity
There are basically two ways of providing for your old age with a private pension. Either you regularly transfer your contributions to the insurer over a period of years. From the agreed start of the pension, the provider then pays you the saved capital as a monthly pension or as a lump sum. Or you can opt for an annuity after a lump-sum payment. In this case, the insurer pays you an immediate pension every month after you have paid in a high one-time amount. If you choose this option, you can only have the money paid out as a lifelong annuity.
How useful are unit-linked products?
A unit-linked life insurance policy, like a life insurance policy, combines coverage in the event of death with a long-term savings product.
The difference: With unit-linked contracts, the insurance company invests at least part of the premiums in investment funds that you select yourself. This gives you a higher chance of a return, but there is no minimum interest rate.
At the end of the contract term, the insurance company only pays you what the fund has generated over the years. In addition, a further part of your premium payments goes into the life insurance. In many of these contracts, however, the agreed death benefit is insufficient. It therefore makes more sense to separate equity savings and death benefit protection. You can do this, for example, by setting up a securities account with low-cost index funds and taking out a life insurance policy at the same time.
Low share prices reduce your pension
Fluctuating share prices mean there is a risk that the contract will end at a time when share prices are low. In that case, the amount to be paid out would be rather small. Therefore, you should regularly review the selected funds. If necessary, you can replace the poorly performing equity funds with good and favorable offers.
If you die as the insured person, your surviving dependents will receive a guaranteed amount. If the fund shares are worth more than the fixed amount, the surplus usually goes to the dependents as well.
With unit-linked annuity insurance, the insurance company invests part of your amount in one or more funds. You can often select these yourself. As with unit-linked life insurance, this results in higher potential returns. At the same time, however, the risk of loss also increases. Since the insurer does not guarantee you a minimum sum, you alone bear the risk of fluctuating share prices.
We recommend a unit-linked pension insurance exclusively as a net policy, for which no acquisition costs are due and which contains favorable ETFs.
What is an index-linked policy?
An index-linked annuity or life insurance policy, also known as an index policy, works in a similar way to a traditional life or annuity insurance policy. What is new about this variant is that insurers invest surpluses earned on the stock market by buying options on a stock index. The way index policies work is very complex and difficult for lay people to understand. It is therefore difficult to assess whether this model generates more returns for customers and depends on the monthly gains or losses of the index price. Another drawback is that potential gains are capped by a so-called cap, which the providers set each year. Losses, on the other hand, are borne by the policyholder alone. High costs for sales and administration also reduce the return. Only the premiums paid in are guaranteed by the insurance company.