What is life insurance?
A life insurance is actually an insurance policy where the insurer commits to paying a sum of money in one of the following situations:
- If the policyholder is alive, the sum is paid on a fixed date, scheduled ahead, for example on the day of the policyholder’s 75th birthday (which is, literally, called a life insurance) ;
- Upon the death of the policyholder (which is, more precisely, a death insurance) ;
- On a fixed date or upon the death of the policyholder (a mix of the above, which is called a mixed life insurance).
Life insurance policies may thus allow you to protect your loved ones in case of death, but also to put money aside for your retirement, for example.
How does a life insurance policy work?
In Belgium, there are two major types of life insurances (that also include death insurances): those belonging to class 21 and those from class 23.
The class 21 policy is actually a savings product in the form of a life insurance policy. It is a risk-free savings plan as you are sure to get back the premiums that you have paid (minus the fees and taxes). The return (in other words, the interest rate), is guaranteed for the duration of the whole contract (the contract may also be unlimited in time). Practically, when you purchase such an insurance, you pay money (premiums) during the contract period, for example each month or each year, at your preferred time. You can also decide to pay a single premium at the conclusion of the contract. At the end of the contract (or in case of death), the insurer will pay back the premiums, with interests, minus the fees and taxes. Please note that you are not obliged to pay the premiums on a regular basis: you may always decide to temporarily stop paying the premiums.
As for the class 23 insurances, they are investment products. It is thus a riskier option, as the return depends of the performances of the funds in which your premiums are invested. Therefore, you may either make huge profit (more significant than those of the class 21 policies) or important losses. Concretely, you invest according to your wishes and finance: you can start with a significant amount (let us say, € 5,000) and then make smaller monthly payments (e.g. € 25).Check with your insurer if there is a minimum amount to be paid. Again, as for the class 21 policies, you have the right to “pass” some payments every now and then. At the end of the contract (or in case of death), the insurer will pay back the current value of the insurance policy, and, as you will have understood, this value varies constantly according to the market.
Finally, the mixed life insurance allows you to put money aside via a savings plan that has a specific objective, for example, paying for your children studies. The value of the savings will be paid by the insurer on a chosen date (defined in the contract) or in case of death.
The table below summarises the differences between the class 21 and the class 23 life insurance policies.
- Guaranteed return
- Limited return
- A withholding tax (30%) is due until the ninth year of the contract (if you decide to terminate your contract during the first eight years, your profit will be seriously reduced)
- Tax deductible
- Protection in case of bankruptcy of the insurance company
- No guaranteed return
- Possibility to make significant profit
- No withholding tax (30%) is due (you can terminate your contract anytime)
- Not tax deductible
- No protection in case of bankruptcy of the insurance company
As you will have noticed, if you want a safe savings product and if your risk appetite is limited, it is best for you to choose a class 21 policy. However, if the possibility of a higher return appeals to you and if you have a greater risk appetite, you may purchase a class 23 product.
Why, when and how to purchase a life insurance policy?
A life insurance can thus be considered an investment that may be worth making anytime, even for younger people who wish to start a savings plan. Moreover, such a policy may also become useful to plan a succession.
First of all, in case of death, leading to bank accounts being blocked, a life insurance can offer a breath of fresh air. Indeed, while all the necessary checks to unblock the accounts are made, the money available via the insurance policy may already be paid to the named beneficiaries.
What is more, a life insurance policy is, as such, an alternative to a will. Indeed, such a product allows you to easily name one or more beneficiaries and to change them whenever you want. The beneficiary can be anyone you like, meaning that it allows you to bypass the legal devolution rules.
Finally, a life insurance allows you to bequeath parts of your estate by “passing the next generation”, thus reducing the amount of inheritance taxes to be paid. Indeed, if you name your grandchildren as beneficiaries of your insurance policy (instead of your children), you give them a boost in life while avoiding those assets to be taxed twice (once when you bequeath them to your children and a second time when they bequeath them to their children).
As you will have understood, purchasing a life insurance policy certainly has advantages, whatever your age. To purchase such a product, you simply have to make an appointment with your broker or any insurer. They will be able to discuss your wishes with you, to make your profile and to give you the best advice. And if you eventually decide to go further, do not forget to let your loved ones know about the policy, to ensure that the beneficiaries actually receive the money in due course. Ideally, you would list your insurance policies in your Morning Blue Passport, which will guarantee that, when times come, your relatives will know about the various investment or savings products that you owned.