Life insurances have one main objective: the financial security of your loved ones in case you die. The functionality luckily is simple and can be explained quickly: If you die within the contract period, your heirs / descendants will receive a one-time payment.
Of course, despite the relative simplicity, there are a few significant aspects that need to be considered and that influence your premium and pay-out alike.
In particular, the correct coverage sum (or insurance sum) and adequate runtime have to be selected. This means thinking about how much money your family would need and for how long you need to be covered. In this document, we want to show you the most important aspects of life insurances, guidelines regarding what coverage sum & runtime to choose and generally give you enough knowledge to make an informed decision.
Who should take a life insurance?
There are several main use cases for taking out a life insurance:
You have a family that you want to provide money for.
As the main or sole breadwinner of your family, you should also take care of the financial security of your loved ones. But even if both partners work, life insurance makes sense. Widow's and orphan's pensions together are usually significantly lower than the last salary of the deceased partner. And if the surviving partner suddenly becomes a single parent, he or she may have to cut back on working hours and salary.
You have a mortgage and want to make sure it is financially secured.
A real estate loan (or any other loan for that matter) can become a financial burden for your partner if you should die. To ensure that your partner can continue to repay the loan and does not have to sell the house out of necessity, you should protect him or her. This recommendation also applies to unmarried couples who have purchased a property together.
You have an important business partner / employee you want to cover.
If you have a company together with a business partner and that partner dies, it will be difficult to resume business activities quickly. The same holds true for losing an important employee that e.g. has specific knowledge to your business. Having a life insurance for these cases is getting more and more traction because it at least offsets the financial aspects and enables you to financially bridge the gap until the business can go back to normal.
Of course there are other scenarios where a life insurance makes sense (e.g. securing a business but for these three cases, a life insurance is very strongly recommended).
What are the benefits of life insurance?
The most important function of life insurances is ensuring the financial security of the surviving dependents. If the insured person dies, the agreed coverage sum will be paid out (the technical term is “death benefit”).
There are three main options when choosing a life insurance:
Most insurers offer variations of increasing or decreasing death benefits: either as a linear variation (e.g. increase or decrease by a fixed percentage each year) or as an annuity (e.g. decrease parallel to a remaining debt, such as a loan).
Increasing benefits are useful to make sure that the coverage sum keep in step with inflation and rising living costs. Generally speaking however, constant coverage sums are the best option for most people
Next to the actual life insurance benefit of receiving a one-time payment of money, a few additional benefits have become standard over the years.
Additionally, there are premium versions of the insurance which add certain benefits:
What coverage sum do I need?
This is probably the most important and not always the most straight-forward question to answer but to start with the answer is: high enough. But let's look at the use cases individually.
For a home loan it's easy, you just take the amount of the outstanding loan. Here you might even take out a decreasing coverage sum, so that the amount covered keeps in line with the remaining loan. But this really depends on your individual case and numbers.
If you want to cover the family expenses, you can use a rule of thumb that has become the de facto standard: 4-5 times the annual gross income. If you only want to cover your partner, for example because you are the main of two earners, then you can set the amount a little lower at 3 times your gross annual salary.
If you have a mortgage and kids / family to cover, then the numbers should be added together. Please see the following table for a few examples:
Ultimately, the coverage sum needs to fit your individual situation and we are happy to a) help you find the correct number and b) show you multiple coverage sum scenarios, if you are simply not sure yet.
How long should the contract run for?
As before, that of course depends on you and your situation. The insurance should run as long as your dependents need compensation for the missing income. For example, the contract could end when your real estate loan is paid off. Or you can let the insurance run until your children are expected to finish their education and earn their own money.
These are exactly the rules of thumb that we use, so that if you for example have two kids and the youngest is 5 years old when taking out the insurance, the runtime should be at least 20 years. That should give your child enough time to stand on its own two feet.
How should I cover myself and my partner?
Many of the life insurances we take out revolve around securing a family and we all know that families can come in various shapes and forms.
What is important, next to finding the right coverage sum and runtime, is to have the right contractual setup to minimize a) the costs you will have now but maybe more importantly b) the costs that can arise from inheriting money / property / funds from your partner.
There are three main scenarios that we mainly come across:
Married couples with kid(s)
For married couples with children, two separate contracts often make sense. Each partner takes out an individual insurance contract and your partner is named as the beneficiary.
Example: Ben takes out a life insurance and put downs Emily as the beneficiary and vice versa. If Emily should die earlier, Ben receives the money from her contract and conversely.
If you should ever separate, you can change the beneficiary at any time. It is also possible to have different terms for both contracts or different sums insured, e.g. if you have one partner that earns significantly more than the other.
After the death of a partner, the surviving partner can appoint the children as beneficiaries. If the worst case happens and the second parent also dies, the children get the money from the insurance contract.
Not married couples with kid(s).
As an unmarried couple, there is a different solution and the reason is pretty mundane: taxes. Since you will receive the money from your partner's contract in the event of death, it will be considered an inheritance and therefore inheritance tax is usually due: While married couples have a high tax-free allowance of 500.000 €, as an unmarried couple you only have an allowance of 20.000 €. Everything above this amount is taxed.
For unmarried couples, there is something that is called the "cross-over insurance" (Über-Kreuz-Versicherung). It works like this: Both partners again take out their own contracts but instead of insuring your own life, you put down your partner as the insured person. That way, if your partner dies, you receive the money directly and it therefore does not fall under the inheritance portion.
In case you should separate, you can ask the carrier for each partner to take over their respective contract, so that each of you can decide anew who should receive the money in case of death.
Couples without kids
For couples that do not have kids (and you most probably will never have), there is the "connected life" (verbundene Leben) solution.
Here you take out one contract on both lifes and if one of you dies, the other gets the coverage sum paid out. The contract ends after that.
There are two main advantages to this solution, namely that these plans are cheaper than two separate contract of the same coverage sum and that the money received also does not fall into the inheritance tax portion.
How much does a life insurance cost?
On the danger of repeating ourselves: that is absolutely dependent on your individual situation. The two main factors playing a role here are the coverage sum and the runtime.
However, there is a variety of factors that add to your personal "risk profile":
Every carrier handles these factors differently but they all take them into consideration but we want to give you some numbers to work with already.
This is why you will need to provide a lot of information about yourself and in order for us to tell you with 100% certainty what will come your way, you will receive the following questionnaires from us:
Why are there two prices shown in the offers?
With life insurance, you will usually find two prices in the offer: the net (or payment) premium and the gross premium.
The net premium represents the price you have to pay for the coverage you get. However, it is not guaranteed and can change if the insurance company's economic situation deteriorates and it generates fewer surpluses. This can happen, for example, if more people die or the company makes fewer profits on the capital market than expected.
Which is the correct policy for you?
Once again, that cannot be generally stated but we need to look at your situation in detail. However, we will always present you with three offers to start with:
We present you with the exact prices from these carriers for the scenarios you want to see. If you want to see more numbers, other carriers, etc. just let us know and we will show you as many offers as you want until we have found the perfect plan to fit your individual needs.
