The loss of a loved one is an event associated with great grief.
If the sole or main breadwinner in the family dies, the emotional pain is compounded by another serious burden for the family members: With the loss of income, partners and children quickly find themselves empty-handed.
If they also inherit liabilities, the worst-case scenario is financial ruin.
Fortunately, there is term life insurance.
This guide provides general information on term life insurance.
What is term life insurance?
With term life insurance, you can ensure that your dependents are financially secure in the event of your death. During the agreed term, you pay regular premiums to the insurance company.
If you die during this period, a predetermined sum is paid out to the beneficiaries specified in the contract – the full amount, even if the insurance policy has only been in force for a few months.
At the end of the contract period, your insurance coverage expires – you or your dependents do not get any money back.
Because there is no savings component, term life insurance is significantly less expensive than endowment life insurance.
However, there are a few tips and valuable hints you should always keep in mind before taking out a policy to ensure the best possible financial protection for your loved ones.
So if you’re wondering, “What do I need to look out for in my term life insurance policy?”, you’ll find the answer here.
Term life insurance: What to consider when taking out a policy?
First of all, it is important to consider who you want to protect financially with your life insurance.
For single people without children, it is probably only worth considering in the rarest of cases, but for young families with only one main earner, it offers reliable and necessary protection in the event of an emergency.
When does it make sense to take out life insurance?
Usually, a major event that brings new responsibilities is a good time to take out term life insurance – for example, the birth of a child or taking out a loan to build a house or buy an apartment.
Term life insurance can also make sense for childless couples if one partner earns significantly less but still wants to be covered in the event of the other’s death.
Not only do couples benefit from term life insurance. Business partners can also reliably insure themselves against the death of one of the parties.
However, term life insurance is less suitable for singles, students, and young couples, where both partners can provide for themselves.
It is also not recommended for older spouses, as higher premiums become due to increasing age.
How long should the term of a term life insurance policy be?
The circumstances that are to be insured also play a major role when considering the desired term.
If you want to cover your children, in particular, choose a term that ends as soon as the children are expected to have completed their education and can stand on their own two feet.
If, on the other hand, you want to protect your partner from the financial burden of a real estate loan, choose a term that corresponds to the duration of the loan.
Term life insurance: tips on the sum insured
The amount of the sum insured is also something you should pay attention to with term life insurance. If the sum insured is too low, you run the risk that your survivors will not be adequately provided for in the event of your death.
If, on the other hand, you set the sum insured too high, you will pay unnecessarily high premiums.
How high should the sum insure be?
Depending on your life situation, you should choose the appropriate death benefit for your term life insurance. These tips will help you decide:
What is your partner’s income?
- What is the income of your partner?
- Do you have children and how long will they be dependent on financial support?
- Do you have financial liabilities such as credit or loan repayments?
- How high are your current expenses – for example, for rent, living expenses, or cars?
- How much monthly required income would be lost due to your death?
Based on these factors, you can calculate exactly how much your survivors’ financial needs will be.
From this, you can deduce how high the sum insured needs to be. As a rule of thumb, families with young children or single parents should ensure five times their gross annual income.
If the children are older or you do not have any children, three times their annual income is sufficient.
Which makes more sense: a static or a declining sum insured?
Which of these two variants you should choose depends primarily on the purpose of the term life insurance. If you want to protect your partner or your children, the static sum insured is the better choice.
The payout in the event of death remains the same over the entire term of the policy. If, on the other hand, you take out term life insurance to repay a loan in the event of death, a decreasing sum insured may be worthwhile.
This is because the decreasing interest burden on the loan also makes it possible to repay the loan more quickly on an ongoing basis. This also reduces the sum insured required.
Which is the right insurance policy: linked, individual or cross-linked?
Insurance companies offer different types of term life insurance that allow you to protect yourself in such a way that the protection fits your needs and your individual life situation exactly.
Couples, in particular, are faced with the decision between three fundamentally different types of term life insurance. What you should pay attention to as a couple and which insurance is best for you depends primarily on your legal partnership status.
1. linked life insurance
With partner term life insurance, a couple takes out a joint policy. In the event of the death of one partner, the other receives the sum insured. If both insured persons die at the same time – for example, in a car accident – the insurance sum is paid out only once.
This makes partner term life insurance unsuitable for couples with children, as the money would not be sufficient in the event of the death of both parents. In addition, the contract expires if one of the insured persons dies and a new contract must be concluded – this requires a new health check.
In addition, with linked term life insurance, it is not possible to change the insured or beneficiary person or to terminate the contract – for example, in the event of separation – without further ado.
2. two individual term life insurance policies
If you want maximum flexibility and are married, go for this option.
Each partner takes out a separate contract, with one partner being the policyholder and insured person and the other the beneficiary.
The beneficiary can be changed at any time. Another advantage for couples with children: If both partners die at the same time, the insured sum from both contracts are paid out to the beneficiaries – thus ensuring sufficient financial provision for the children.
Each partner is both policyholder and beneficiary – i.e. insures himself or herself against the death of the partner. As a result, the payment of the death benefit is not considered an inheritance, but a contractual benefit.
It is therefore tax-free. If both partners die at the same time, both sums insured are paid out to the surviving dependents.
linked life insurance:
- Advantages: favorable
- Disadvantages: inflexible, in case of death of both contract holders only one payout, the contract is terminated when one insured person dies.
- Suitable for: childless spouses, business partners
Two individual insurances
- Advantages: flexible, in case of death of both policyholders both sums insured are paid out
- Disadvantages: for unmarried couples, inheritance tax may be due
- Suitable for: Married couples with children
Cross life insurance
- Advantages: no inheritance tax for unmarried couples, in case of death of both contracting parties payment of both sums, insured
- Suitable for: unmarried couples with or without children
Term life insurance: What to look for in a health check?
Once you have decided on a policy that suits you and your life situation, the next step is the health check.
Every insurance company calculates premiums based on numerous health questions – such as how old you are, whether you smoke, participate in dangerous sports or have any pre-existing conditions. Some insurers also require a medical checkup – but usually, you simply answer an extensive questionnaire for term life insurance.
What you should pay attention to Fill out the questionnaire truthfully, otherwise you may be denied the contract benefit and your dependents will be left without financial protection.
Term life insurance protects your survivors from financial difficulties in the event of their death.
Especially for couples with children, taking out term life insurance is a good tip. But business partners and couples who have taken out a loan together also benefit from term life insurance – if they know what to look out for.
The term depends on the circumstance you want to cover – for example, the term of a loan or the period of time until your children can stand on their own two feet. It’s best to calculate your dependents’ financial needs to choose the right payout amount.
Static insurance amounts are ideal for family protection while decreasing one protection in the event of outstanding loan repayment.
For couples, there are three ways to purchase term life insurance: With a linked policy or two policies purchased separately or cross-insured.
Fill out the insurer’s health questionnaire carefully and truthfully. Otherwise, your insurance coverage could lapse.