Life insurance, an ideal way to prepare and plan your legacy
Life Insurance in Luxembourg
Luxembourg life-assurance products offer a unique level of protection to the investor, a high degree of flexibility with regard to contract design and asset management, complete tax neutrality and confidentiality guaranteed by law. These advantages make the Luxembourg life insurance contract one of the best tools available for asset management and succession planning for wealthy European and international clients.
The applicable tax rate for both subscribers and beneficiaries is that of their country of residence and life assurance enjoys favourable tax treatment in most European countries. Luxembourg charges no tax on premiums, nor on capital gains made at the time of the contract’s purchase or expiry nor on death benefits. Luxembourg life assurance contracts are designed to respect the legal and tax requirements of the subscriber’s country of residence.
An attractive investment product
Over the last few years, permanent life insurance has been more and more used as an investment product. It allows you to reach financial and wealth goals and combines various investment vehicles with a specific legal framework and a preferential tax treatment.
Several types of life insurance policies are proposed depending on duration, output options (annuity or capital), investment options and investor profile (low-risk products offering the possibility of guarantee at maturity or financial insurance products under free and discretionary management).
A unique protection in Europe
Luxembourg legislation provides complete protection to life insurance policy holders. The main strength of this investment protection regime is the requirement, by law, that all client assets must be held by an independent custodian bank appointed by the life insurance company and approved by the Luxembourg insurance regulator. This arrangement is known as “Triangle of Security”. The mentioned regime provides for the legal separation of the assets of the policy from the assets of the assurance company, meaning that the creditors of the company cannot seize the assets of the policy. Furthermore, the custodian bank is required to use the clients’ assets solely for the purposes of the investment and is bound by the regulator’s legal powers to protect policyholders’ interests.
Life insurance policies are financially advantageous and complete, but can be very complex. Ask about the various offers, compare them and be sure that you understand the clauses of the insurance contract before signing.
Why do you need life insurance?
A life insurance policy pays out a lump sum to your loved ones if you pass away. If you have children or other people relying on you financially, it is important to think about their future and how they would cope financially should you pass away. A life insurance policy gives you peace of mind that your loved ones will be financially protected.
A life insurance pay out could be used by your loved ones to:
- Pay off a mortgage
- Replace an income
- Pay for childcare or education costs
- Maintain their current standard of living
How does a life insurance plan work?
At the time of taking out your life insurance policy, you determine the policy term and the amount you would like to be paid to beneficiaries. Then, you make regular payments of the premium depending on your resources and your objectives for policy maturity.
When the policy reaches maturity, you will receive the insured lump sum amount that has built up in the policy, plus interest. If you should die before policy term, then an indemnity of 100% or more (depending on the policy) of the savings amount which has accumulated, or the guaranteed amount, is then paid out to the beneficiary.
What is the average cost of life insurance?
The cost of life insurance varies from person to person. So if you’re a non-smoker, for example, you’ll pay less than a smoker. And younger people usually pay less than older ones.
The cost will also depend upon the type of cover. For example, ‘level’ term insurance, where the amount of cover stays the same for a set number of years, costs more than ‘decreasing’ term insurance, where the amount reduces over the years (usually in line with a mortgage).
To get an idea of how premiums can differ, let’s look at price a 30-year-old non-smoker would pay for a 25-year term policy with a 236,966.82€ pay-out, and the price a 45-year-old smoker would pay for the same cover.
Running a quote on TopAssur, a 30-year-old non-smoker could expect to pay around 10.07€ a month, which works out at a total of 3,021.33€ over the life of the policy.
The 45-year-old smoker would pay nearer 59.24€ a month over the life of the policy, or 17,772.51€ over the 25-year term.
So the earlier you buy insurance, the cheaper the premiums will be. And stopping smoking will also have a dramatic effect on what you pay.
How much cover would you need to pay off your debts after you die?
The rather gloomy question: ‘What would happen to my family if I was to die?’
How much of your mortgage is still outstanding?
How much do you owe in other debts?
How much would your family need to live off?
How much help would they need with funeral costs?
The amount of cover – known as the sum insured – depends largely on your personal circumstances. For example, if you have a big mortgage and a large family, you will need more cover than someone who has a small home loan and one child.
Most often recommend a sum assured equivalent to 10 times your annual income, though you should carry out more detailed calculations to make sure you are properly covered.
How much term life insurance do you need?
One thing to keep in mind when purchasing term life insurance is that companies have “break points,” so you’ll usually get a lower rate if you buy 448,994.25€ worth of coverage, rather than 426,544.54€ worth.
If you don’t like the idea of getting nothing for the premiums you pay into your term life insurance policy, you can pay a higher rate and purchase a return-of-premium term policy. That means once the term is completed, your life insurance company will repay you the amount you paid in for coverage.
Another consideration is convertibility, which allows you to convert your policy to permanent life insurance without having to answer questions about your health. Some term policies allow you to make the switch within the first few years after you’ve obtained coverage. Other policies allow you to make the change at any time during the term.
Whole life insurance
If you’re looking for a way to help guarantee your family’s financial future, whole life insurance will pay if something happens to you, plus build cash value that you can tap into as long as the policy remains in force.
Whole life insurance is one of the four main types of permanent life insurance. It will continue to provide coverage as long as you pay the premiums or until you pass away, rather than ending after 20 or 25 years.
And the premium on a whole life policy will remain the same, year in and year out.
How whole life differs from term life insurance
While most people would rather not think of their own mortality, many consumers decide to buy life insurance because of a major life event. These include getting married, getting divorced, having a child or adopting a child, purchasing a home, or experiencing the death of a friend or family member.
A whole life insurance policy costs more than term life – usually a lot more – because you’re not only paying the premium on the insurance policy, you’re also paying to build up cash value for the policy, which typically earns a fixed, guaranteed rate of return. The cash value accumulates on a tax-deferred basis.
Unlike whole life insurance, which is designed to last a lifetime, term life covers you for a certain period of time, such as 20 or 30 years. If you die during the time that your term policy is in force, your beneficiaries will be paid the face value of the policy. But if you die after the term is up, your beneficiaries will get nothing.
That means if you purchase a 448,994.25€ term policy that lasts for 20 years and you die after 15 years, your beneficiaries would get the 448,994.25€ tax free. If you die after 21 years, they won’t receive a thing.
And if you want to renew a term life policy after that 20 years is up, you’ll pay a higher premium because of your age. If you’re in ill health, you might not be able to buy a policy at all.
Once you buy a whole life policy, you’re set for life. Unless you fail to pay your premiums, it doesn’t expire and can’t be revoked.