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What exactly is life insurance?
Life insurance falls under the category of savings products. It takes the form of a policy sold by insurance companies. Most often, this policy is offered through an intermediary, also known as a distributor. This could be, for example, your bank or a specialized firm, such as a life insurance broker like Raizers.
Like any savings product, its main purpose is to grow the money deposited in the saver’s account. In other words, it aims to increase the funds entrusted to the insurer in order to generate a return at the time of withdrawal. This return can then be used to fund the project of your choice (purchasing real estate, passing on an estate, etc.).
Why should you purchase a life insurance policy?
There are many reasons why you might decide to purchase a life insurance policy.
Grow Your Savings
As mentioned earlier, the primary purpose of life insurance is to help your savings grow. Rather than leaving part of your money sitting idle in a checking account or a savings product with a very low return, you put it to work in a way that yields a higher return. By choosing wise investments, you can generate significant capital gains, which can be very helpful for your future plans.
Planning for a costly project or your retirement
Your children’s weddings, a trip to the other side of the world, a financial safety net for your retirement… Taking out a life insurance policy is the perfect way to plan for major future expenses and enjoy greater peace of mind as the years go by.
Help ensure the smooth transfer of your assets to your loved ones
While life insurance is not a retirement plan, it does simplify the process of passing on your assets to your loved ones. In particular, it offers the following benefits:
- a total exemption from inheritance taxes, provided that the designated beneficiaries of the contract are the surviving spouse or civil partner (or, under certain specific conditions, siblings);
- a significant tax deduction for any other beneficiaries (usually your children).
How does life insurance work?
The world of investing can be intimidating to beginners. Investment funds, financial assets, unit-linked products, and publicly traded companies are all terms that can seem daunting at first. However, none of this is really complicated—you just need to take the time to learn about it.
The Safe Metaphor
Let’s take life insurance and how it works as an example. To fully understand this savings product, imagine a safe into which you place various envelopes. Each of these envelopes contains a certain amount of money, which you determine. Over the years, the amount in these various envelopes may:
- increase;
- to stagnate;
- decrease.
As the owner of the safe deposit box, you can choose to change the amounts in each envelope at any time. Similarly, you can remove envelopes or add new ones as you see fit. Please note, however, that you will be required to pay the safe deposit box custodian a small annual fee (management fee) for safekeeping your savings.
But then, what determines whether the value of a portfolio increases, remains the same, or decreases? Well, quite simply, it’s the investment vehicle associated with that portfolio. To put it simply, keep in mind that:
- Investment options that have the potential to significantly grow your savings are generally the ones that carry the highest risks and are therefore best suited for experienced investors;
- The investment vehicles that offer the lowest returns are also the safest, which often makes them the preferred choice of the most cautious savers;
- There are many so-called “intermediate” investment portfolios that offer a balanced relationship between potential return and risk tolerance.
Managing Savings Through Life Insurance: We Explain Everything
Where does my money go when I invest it?
When you sign your life insurance policy, you’ll have a choice of several investment options. You can choose from:
- a single-asset contract, which is theoretically the least risky option, since your savings will be invested exclusively in a euro-denominated fund (we’ll explain all of this right after!);
- a multi-asset contract, which combines euro-denominated funds and unit-linked products (UC) and offers you greater flexibility and more opportunities in choosing the assets in which you wish to invest, in exchange for a risk that is considered higher (although the reality is somewhat more nuanced).
The Euro Fund
It is considered the least risky investment. The funds are, of course, denominated in euros and invest in financial assets whose returns are usually set in advance. It is important to note that the insurer guarantees the principal, which means that, in theory, you cannot lose money—which is why this investment vehicle is favored by the most conservative investors.
Units of Account (UA)
To put it simply, unit-linked investments encompass a wide variety of investment types. These include, for example, investments in unlisted companies, stocks, and bonds. This allows you to invest in a wide range of sectors, such as technology, healthcare, or, more broadly, real estate.
The main appeal of unit-linked products lies in their higher returns compared to euro-denominated funds. On the other hand, these investments are (generally speaking) considered riskier and may, for example, result in a loss of principal.
How do I know where to invest my money?
It’s always difficult for a beginner to know which investment vehicles to choose for their savings. Fortunately, it’s now easy to get guidance and advice. With that in mind, you can opt for a managed investment strategy. Simply put, you entrust your savings to a portfolio manager who is responsible for growing your money on your behalf. Based on your preferences, the manager may choose conservative, balanced, or aggressive investments.
However, there’s nothing stopping you from choosing a self-directed management option. This option gives you greater independence, since you are solely responsible for managing your investments. You are then completely free to make the investments you deem most appropriate.
Can I manage my savings however I want?
You are fully within your rights to manage your savings as you see fit. However, please be aware that reallocations (transferring all or part of your savings from one investment vehicle to another) may incur fees.
Similarly, the self-directed management option naturally offers more flexibility in how you manage your money. But rest assured, you also have control over your savings in the managed investment option. You can decide at any time to change your investment strategy (for example, switching from a conservative to an aggressive profile, or vice versa) or withdraw a portion of your savings.
How do I get my money back?
Again, it's not complicated at all. You can withdraw all or part of your savings whenever you want. All you have to do is submit a request to your insurer. In this case, you have the following options:
- a partial withdrawal: you can withdraw a portion of your savings to use as you wish, without having to provide a reason;
- A full surrender: You receive the full amount of your savings and, as a result, terminate your life insurance policy.
Life Insurance: Is the Tax Treatment Favorable to Savers?
The tax treatment of life insurance is generally considered favorable. In fact, only the returns (interest and capital gains) are considered taxable. As such, they are subject to social security contributions (17.2%) throughout the term of the policy. However, they are completely exempt from income tax as long as you do not make a withdrawal (partial or total surrender).
Specifically, if you decide to purchase a life insurance policy, here is the rate schedule that will apply:
This explains why it is so often recommended to take out a life insurance policy with a minimum term of 8 years!
A Closer Look at Wealth Transfer
In the event of the policyholder’s death, the designated beneficiaries of the policy are fully exempt from estate taxes only if they are the surviving spouse or civil union partner. Otherwise, a favorable tax deduction is still available. This is a significant advantage when it comes to passing on your estate to your children, if applicable.
Keep in mind that:
- The tax exemption is set at €152,000 per beneficiary if the payments (funds deposited into the life insurance policy) were made before the policyholder turned 70;
- The tax deduction is set at €30,500 for payments made after the policyholder turns 70 (such payments are then subject to inheritance tax).
What are the pros and cons of life insurance?
Are you on the fence about purchasing life insurance and would like to understand it a little better? The table below summarizes all the pros and cons of this savings product: