5 Things Families Need to Know About Life Insurance

Term life insurance supports your family financially if you pass away within the duration of the cover. But how do you find the right cover for you? And what do you need to look out for? This article clarifies 5 things you need to know before you take the next steps.

1. Choose the right level of cover

When buying term life insurance, the very first thing to do is choose the amount to be paid out if you pass away. This lump sum should be high enough that your family can comfortably get by for a certain length of time without your income.

A basic rule of thumb is to set the payout equal to between 3 and 5 times your gross annual income. The more children you have, the higher you should set the lump sum. Financial obligations are another important factor. For example, if you buy a house, it’s likely you will take out a large loan. In this case, the lump sum from your life insurance should help ease the financial burden for your family.

Let’s do a quick calculation. If you have a gross annual income of €50,000 and a loan of €100,000, you should arrange a lump sum between €250,000 and €350,000.

Our tip? Before you get life insurance, make sure you consider any large investments you’re planning to make in the future. You can also try to arrange a more flexible contract with your insurer. See point 4 for more info.

2. Choose the right level of cover

As with many other kinds of insurance, it makes sense to get your life insurance while you’re young. The younger you are, the less you pay. But age is only one factor that influences the monthly costs. To get life insurance, you will need to have a health check. This aims to assess certain risk factors, such as your pre-existing health conditions, dangerous hobbies, tough physical jobs and whether you smoke.

But aside from the price, there are certain times in your life where financial security is especially important. One example is if your partner’s wage would not be enough to cover living expenses by itself. Or if you have financial obligations that you would not be able to pay off with your existing assets. A family member passing away is already enough of a burden. Term life insurance can at least ease the financial load on your family.

3. Insure your partner the right way

If you and your partner depend on each other’s income, you should both consider getting life insurance. There are a few different ways to do this. Which model is best for you depends on your legal marital status and whether or not you want to insure your children. You should always check whether you can make changes to your policy, for example if you and your partner split up.

You can either get a joint life insurance policy, two individual policies or you can have cross-ownership of each other’s policy. Each model has its own strengths and weaknesses depending on your situation. For more tips on how to choose which life insurance model is most suitable for you, read this article.

4. Stay flexible

In addition to these different policy ownership models, you should also look out for a contract with renewable terms or guaranteed insurability (in German: "Nachversicherungsgarantie”). This allows you to adjust the lump-sum payout later on, without having another health check.

This added flexibility is really important for young families. Term life insurance policies typically run for a duration of 10, 20 or 30 years. Your situation can change a lot during this time. At some point, you will have paid off the mortgage on your home and your children will earn their own money. This would affect your insurance needs.

You should therefore check that you can easily adjust your payout or contract length in the case of certain events, such as getting married, having children, or purchasing property.

5. Choose a tax model that works for you

When you buy term life insurance, the goal is to support your family members financially. If the worst happens, your relatives will inherit the lump-sum payout. This means that it is subject to inheritance tax. For married couples in Germany, inheritance tax is due on any amount over €500,000. Unmarried couples, however, have to pay tax on any inheritance above €20,000. But there is a way around this.

With cross-ownership of a life insurance policy, you can avoid paying inheritance tax. Find out more in our article about the 3 most common models of term life insurance.

We aim to help you get the best insurance cover so you can simply enjoy your life. That’s why we provide you with all the information you need to make the right decisions.

Arrange a non-binding consultation with one of our advisors today to clear up any questions and discuss the next steps.