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capital life insurance

by Steven Brown
capital life insurance

capital life insurance

‌Endowment insurance is a hybrid of death benefit and savings plan: ‌ ‌1

) One part of the money is saved and widely invested in bonds. ‌ ‌2

) The other part of the money is used as security in case of death. ‌ ‌If the insured person survives the end of the contract – this is also called “survival” – the insurance income is paid out. ‌ ‌Nowadays you shouldn’t take out endowment insurance anymore. Older endowment life insurance policies can still be of some use because of the high-interest rates. In the case of newly concluded contracts, however, the disadvantages clearly outweigh the disadvantages. Anyone who has already taken out endowment life insurance should recalculate carefully whether the insurance is worthwhile at all.

Advantages of
endowment insurance

Tax benefits: Withdrawals may be tax-deductible. 

Tax-free: If the insurance was taken out before 2005 and the term is at least 12 years, the income is tax-free. 

Final bonus: This is paid out at the end of the contract period.  

High yields for old contract holders: Old contracts often have high guaranteed interest rates. In the past, a rate of up to 4% was even granted (in comparison, since 2017 a vanishingly small interest rate of only 0.9%).‌

Disadvantages of an
endowment life insurance

High costs: It is an expensive variant of life insurance since risk protection and asset accumulation are “mixed” in one contract. 

Low return: The guaranteed interest rate has fallen sharply over the years and is currently 0.9%. Surplus shares are low. 

Difficult to classify: As a mixed product, endowment life insurance cannot be precisely classified. It is risk protection combined with wealth accumulation.  

Opaque cost items: It is difficult to calculate the actual cost. 

Very long term: Less than 50% of endowment life insurance contracts run for the entire term of the contract. Precisely because of the long term, most are terminated early. Policyholders often need their money much earlier.‌

Unit-linked life insurance

‌This type of life insurance is a hybrid of term life insurance and investment. The money is invested in mutual funds. There is no profit participation and no guaranteed interest. Unit-linked life insurance can be very risky. ‌ ‌The term can be agreed upon in different lengths. If the policyholder dies during the term, his/her death is covered. The possibility that the policyholder survives the insurance term is also taken into account.‌

Benefits of unit-linked
life insurance

Opportunities of the stock market: If the stock price rises, this is advantageous for life insurance – and vice versa. 

Free switching: Depending on the policy, the policyholder can have the funds switched free of charge. ‌

Disadvantages of unit-linked
life insurance

Double the cost burden: Both life insurance and the fund company have to be paid. 

Risk of a total loss: The investment in this type of life insurance is subject to the fluctuating share price. Because stocks are very speculative products, the worst that can happen is that the invested assets are suddenly no longer there. 

Several funds = several risks: Since the money is invested in several funds, the risk increases further. Each fund can have its own problems.  

High closing costs: There are no precise rules for closing costs. As such, they can be many times higher than typical life insurance.‌

Private pension insurance

‌Private pension insurance is a popular form of old-age provision in Germany and basically works like life insurance. The insured must pay regular contributions to the insurance company (monthly or annually). The insurer gets a part of that. The remaining money is saved and earns interest. ‌ ‌In old age, a pension is paid out until the policyholder dies. The annuity payments end with death. In contrast to term life insurance, the surviving dependents do not receive any money.‌

Advantages of private
pension insurance

Capital payment for life or once: The policyholder can choose whether he wants the capital to be paid out all at once or regularly. 

Tax advantages: During the savings phase, the amounts are not tax-deductible, but only the income portion has to be taxed.

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