It is a type of “elephant in the room” subject: is your estate large enough and liquid enough to provide for your family should you die? It is the combination of the two that often causes challenges.
In some households there are two incomes; if one falls away there is at least one. But what if the one falling away provides for all the fixed expenses including housing? Does this death almost immediately causes drastic actions, like forcing the survivors to move house? Terrible thought.
Life insurance can act as a savings tool (the premiums you pay are invested and on an agreed date in the future you will receive a certain sum of money provided you are still amongst the living) or as a risk mitigant (the beneficiary you name will receive a certain sum of money if you die before a certain date). We call the latter a term life insurance and this is the subject of this article.
Part of the plan
We always say you should only insure financial risks you are unable to bear. If you have the money to bridge a temporary loss of income or to absorb a structural loss of income: please do not spend your money on insurance premiums!
Sometimes clients can afford the financial loss but not on a random moment; if the timing of the event is off, you can still run into difficulty if you need time to free the money. This happens a lot with home owners.
You should also consider entitlement to other state or employer insurance. As a Dutch taxpayer you also contribute funding for Survivor Pension. This temporary income is subject to certain qualifications but it can reduce the need to insure. Another example is a funeral insurance. This is a term life insurance aimed at covering the funeral expenses. Not a big sum, but it eliminates an unwelcome spike in expenses at a moment your household has more priorities to manage. Several parents have started this type of insurance for their children. When these children leave the nest, many continue this somewhat hidden protection (small fee) but if you have it you should not insure yourself more than once.
We financial planners are equipped to run financial scenarios to show potential financial gaps you can consider to mitigate. We create a base case and run the scenario that you die, or your partner dies. Some participate in pension schemes which include partner protection. But many do not. This process is useful for everybody. It shows where you are exposed and where not. So you can take actions where necessary.
Important aspects of term life insurance
Recently, the reputed DFO institute published its annual survey. The 2020 edition included 1,000 evaluations and qualitative interviews with mostly large intermediaries of term life insurance products. A couple of notable conclusions:
- Prices of insurance have dropped at the expense of a) service, b) stricter terms to accept the insured risk so less fixed fee products going forward and c) potential deterioration of insured cover for expected riskier life events;
- Large differences in cover and other terms
- Permanent or temporary world event cover or restricted to a region
- Riskier sports cover
- Differences in temporary cover before final acceptance of cover by the insurer
- Acceptance of recovered cancer patients
- Early policy amount release if terminal illness is discovered
Estate planning aspects
For couples with separate estates (under prenuptial agreement) where the one separately pays the premiums for the term life insurance of the partner’s body, the term life proceeds are kept outside the inheritance for tax purposes. So this Dutch tax rule can steer a lot more (up to 20%) inheritance in the right direction.
The Dutch have a tendency to over-insure. You should not make that mistake but rather an informed decision aimed at achieving deliberate results of your financial plan/