Does Life Insurance still make sense? or are there Alternatives?

Does life insurance still make sense or are there alternatives? Life insurance used to be an integral part of old-age provision. Statistically speaking, every German today has a life insurance policy. But how exactly does life insurance work? What is the difference between term and capital life insurance? And does the deal even make sense in times of persistently low interest rates? We explain everything important about the topic in this post.

What do I get from life insurance?

life insurance

Life insurance is primarily a life insurance policy. As such, it provides financial security for the surviving dependents in the event of the death of the insured person. If she dies, the relatives receive a fixed amount of money. This form of life insurance is also known as term life insurance.

There are also so-called capital-forming life insurance policies that combine life and survival insurance. With this “classic” form of life insurance, the contributions and income are also paid out when the insured person experiences the end of the contract period. Accordingly, endowment life insurance is not limited to survivor protection, but can also serve as private retirement provision.

Term or capital life insurance – which is better?

life insurance

Whether you decide to take out term life insurance or endowment life insurance depends entirely on your personal goals and needs. The main question that should be asked is: Do I only want to cover my loved ones or do I also want to save for old age?

Term life insurance

Term life insurance can be useful, for example, if you are the main or sole breadwinner and want to financially protect your partner and children against your own death.

Endowment life insurance

Endowment life insurance as a hybrid of survivor protection and savings plan also offers the possibility of making private contributions to your own retirement provision through long-term savings.

Unit-linked life insurance

Unit-linked life insurance is another form of capital-forming life insurance. Here, too, the insured person regularly saves money over a certain period of time. It differs from classic life insurance in that the insurance company invests part of the premiums paid into funds. As a result, the amount of the insured sum paid is indefinite. Because on the one hand, the return opportunity for the policyholder increases; on the other hand, he alone bears the risk that his contract will end in a weak market phase or even incur losses. Because, like all securities, funds are subject to fluctuations, which can ultimately lead to losses.

Index policy

Even with an index policy, the policyholder has the opportunity to participate in the capital markets. To this end, he can choose every year whether his contributions should be invested on the stock exchange. Specifically, the insurance company puts the profit sharing in options, for example, in order to participate in the performance of an index such as the DAX or the EURO STOXX 500.

Does life insurance still make sense?

insurance

Whether or not it makes sense to take out life insurance nowadays depends on the option chosen. Term life insurance is still considered to be sensible in order to secure family members financially – especially if the family is dependent on the income of the insured person. Term life insurance can also be used to secure real estate financing, because in the event of death, the surviving dependents can use the sum insured to service the loan installments. However, many experts nowadays advise against taking out endowment life insurance for private old-age provision – for example as pension provision for the self-employed. According to experts, speak against such contracts:

  • The low guaranteed interest rate
  • The abolition of the 100 percent contribution guarantee
  • High costs
  • Lack of flexibility
  • Lack of transparency

The guaranteed interest rate will decrease in 2022

Analysis Insurance

The persistent phase of low interest rates does not stop at life insurance either. In January 2022, the guaranteed interest rate will be reduced from 0.9% to 0.25%. The guaranteed or maximum technical interest rate determines how high the interest rate that insurers can offer new customers. Savers thus get less interest income on their deposited money.

The premium guarantee is often no longer applicable

In addition, some insurers have since abolished the one hundred percent premium guarantee. This means: some companies no longer guarantee that the insurance company will receive all of the premiums it has paid in at the end of the term.

High costs

Life insurance is often associated with high sales, purchase, or administration costs. These are deducted from the contributions paid in the first 5 years after the conclusion of the contract and also reduce the return.

Lack of flexibility

Life insurance policies usually have very long terms. This is why it is not uncommon for capital-forming life insurances in particular to be terminated prematurely. However, termination is always associated with losses.

Lack of transparency

Life insurance critics also criticize the lack of transparency. For example, insured persons could not check how high the surrender value or the maturity benefit of the life insurance are. In the case of unit-linked products and index policies in particular, the exact amount paid out depends, among other things, on the insurer’s investment skills.

Who Needs Life Insurance?

insurance

From the point of view of many experts, life insurance is now only worthwhile for reasons of survivor protection. For sole earners with an ongoing home loan, it can make sense to take out term life insurance because in the event of death it closes a possible pension gap for the surviving dependents and helps ensure that the loan taken out can be repaid.

Term life insurance is also an option for companies. Because if the owner, one of the business partners or a key employee suddenly dies, the very existence of the company can be at stake. Term life insurance is one way of protecting the continued existence of a business.

Savers, on the other hand, should look for alternatives to investing, such as retirement provision with ETFs or other securities. However, securities are subject to various risks, such as fluctuations, which can also lead to losses. You can find valuable tips on building wealth in old age and on various securities in our comdirect magazine.

How long does life insurance have to run?

In principle, the term of the contract is freely selectable. However, in the first 5 years, the acquisition costs are deducted from the premium payments – only then do you save money as the policyholder. Furthermore, terms of less than 12 years do not make sense, as the income must be fully taxed in this case.

Does it make sense to cancel a life insurance policy?

Anyone who cancels their life insurance must accept losses. In this case, the insurance company only pays the customer the so-called surrender value; all costs and fees will be charged in advance. The so-called secondary market is an alternative to termination. There are providers here who buy life insurance in order to continue to operate it themselves. In return, they pay the insured a little more than the surrender value. In order to cover short-term money requirements, there is a third option of borrowing from life insurance.

How much tax do you pay on a paid life insurance policy?

Life insurance policies that were taken out before 2005 are particularly favorable in terms of taxation. Most of the contributions can be deducted from tax as special expenses. If the contract was concluded before December 31, 2004 and is paid out as a one-off sum, the policyholder pays no taxes at all on the maturity benefit under certain conditions in the event of survival.

Since 2005, when the capital is paid out, 25% withholding tax is due on the income – possibly plus solidarity subsidy and church tax. However, reduced taxation also applies to such new contracts under two conditions; in such a case, only half of the income is taxable, but at the individual tax rate:

  • The duration of contracts is at least 12 years.
  • The insured person has reached the age of 60 at the time of payment (if the contract is signed from 2012, the age of 62).

What do you have to consider when paying out a life insurance policy?

In addition to the tax aspects mentioned, there are other points that should be considered when paying out a life insurance policy. The time of payment differs depending on the type of life insurance: While the insured event in term life insurance occurs when the insured person dies, in the case of endowment life insurance payments are made at the end of the contract period; this also applies to capital-forming variants such as unit-linked products and index policies. Another special feature of endowment life insurance: Policyholders can often choose whether they want to have the saved capital and income paid out as a one-off payment or as a monthly annuity.

Conclusion: Better to separate death protection and savings

As a survivor protection for families and companies, life insurance can still be justified today. In view of the low interest income and long, inflexible terms, however, there are alternatives for savers and investors that can be more worthwhile. That is why some experts advise separating death protection and saving for old age and combining term life insurance with an investment in alternative asset classes such as ETFs or funds.

Do you have any questions about investing or other banking matters? If you have any questions, you can contact our customer service at any time – by phone on 04106 – 708 25 00, via our contact form or via live chat. Our customer advisors are available for you around the clock – 7 days a week, 24 hours a day.

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