Of course, we all hope to live a long and healthy life. Unfortunately, this is not always within our control. Therefore, it is good to start thinking now about the financial consequences for your next of kin when you pass away. In addition to a major emotional impact, the death of a partner can also have a major financial impact. Will your dependents still be able to pay the rent or mortgage if your income drops? What about all the fixed costs and bills? Term life insurance ensures that your loved ones are not left with financial worries when you pass away.
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What is term life insurance?
Term life insurance is also known as survivors insurance. With term life insurance, you ensure that your dependents receive a prearranged amount of money if you die before the insurance policy expires. This ensures that your dependents have more financial security and can absorb the loss of your income. With this sum of money they can, for example, continue to live in the current home, pay the fixed expenses or pay off outstanding debts. Term life insurance is temporary insurance with a predetermined term of between 10 and 30 years. It is not mandatory insurance but it is useful to look into.
Why take out term life insurance?
There are several reasons why you should purchase term life insurance. Especially if you have a partner or family, it is a good idea to think about term life insurance. Often people don't realize their dependents will suffer financially when they die. After all, an income is lost while expenses remain the same. Your partner will probably receive a survivor's pension, but this is not always enough to pay all the bills.
When you pass away, of course you would prefer to leave your partner without any financial worries. Therefore, take a look at what would happen if you or your partner dies. Can the surviving partner continue to live in your home? If you have children, the partner left behind might have to work less or the children might have to go to daycare more often, increasing those costs as well. All in all, this can have major financial implications. Death benefit insurance ensures that your partner is not left with financial problems. It is also important that you purchase a good term life insurance policy and research it.
What do you pay attention to when buying term life insurance?
There are a number of things to look out for when buying term life insurance.
- There is a maximum age limit attached to taking out life insurance. Usually this is between the ages of 60 and 74, but this varies by insurer. Insurers also use a final age. The final age is the maximum age at which the insurance stops. The final age is usually between 74 and 85.
- The older you are, the higher the premium for term life insurance will be. After all, the likelihood that you will die also increases.
- Are you a non-smoker? Then most insurers will probably give you a substantial discount on the premium. Therefore, the premium for smokers is a lot higher than for non-smokers. Do you conceal from the insurer that you smoke or that you start smoking (again)? Then insurers use a penalty clause and your surviving relatives will receive less, for example.
- When you purchase a term life insurance policy, you must complete a health statement. The health declaration consists of a series of questions about your health, both present and past. A health declaration can also be a reason for an insurer to reject your application for insurance. Always fill in the health declaration truthfully, because if the insurer finds out that you have withheld or distorted information this can have (financial) consequences. The insurer may also submit a medical examination that is reimbursed by the insurance company itself.
Term life insurance comes in three different forms: constant, straight-line and annuity. Each form has its own advantages and disadvantages. We explain all three forms below so you can make an informed decision.
With a level term life insurance policy, you insure a fixed amount. This amount remains the same throughout the term of the insurance. When the insured person dies, the same amount is always paid to the beneficiary. With this form, it does not matter whether you die in the first year of insurance or in the last year. Term life insurance is suitable for covering expenses that remain the same for a longer period of time. Consider, for example, an unchanging mortgage debt.
With linear decreasing death benefit insurance, the amount paid at death decreases with each year. The decreasing amount is always the same. So the amount paid out at death decreases proportionately each year. Thus, if you die in the first year after taking out the policy, your dependents will receive the highest benefit, and if you die at the end of the term, they will receive the lowest. This form of term life insurance is often the cheapest. Moreover, this form is often chosen by the elderly, because the need for a death benefit often decreases as you age.
With annuitized term life insurance, you receive a lower amount at the end of the term than at the beginning of the term. The amount paid out decreases slightly at the beginning of the term, and decreases more sharply later. In the first few years of life insurance, the amount often decreases barely at all, while it decreases much more sharply at the end of the term. Often the annuity rate, the rate at which the amount decreases, is between 4% and 8%.
Frequently asked questions about term life insurance
How does term life insurance work?
When taking out life insurance, you choose the amount insured. It is important that you check what amount is needed for your partner and any children if your income drops. You can also choose the type and duration of your term life insurance. Often you will also have to fill out a health statement. You then determine the premium each month or each year during the term. Do you die during the term of the insurance? Then the insurer will pay the insured amount to your next of kin.
What does term life insurance cost?
The cost of term life insurance varies from person to person. This is because they depend on a number of factors, such as:
- Your age
- The term of the insurance
- The amount of the sum insured
- Your health
- Whether you smoke or not
- The form of insurance
When does term life insurance not pay out?
Term life insurance is temporary insurance. This means that the insurer pays out the pre-agreed amount if the insured dies during the term of the insurance. If the insured is still alive at the end date of the insurance, the right to payment lapses and the insurer does not pay out. Also, a term life insurance policy will not pay out if it appears that you have lied in the health declaration (for example, if you conceal that you smoke or have smoked, or if you do not report that you have a certain disease).
When is the best time to purchase term life insurance?
The premium for term life insurance is lowest when you purchase it when you are still young. When you are still young, the probability of death is low. Therefore, the premium rises the moment you are older and want to purchase term life insurance.
If you are young and die, you may leave behind a partner and (young) children. That is when the need for benefits is highest. Paying off mortgage, fixed expenses, saving for the children, for example for college. At that stage of your life, you probably have a lot of expenses. That is why it is wise to look into death risk insurance in time.
You can also link term life insurance to your mortgage. This is called pledging. If you die during the term of your insurance policy, the insurer pays the amount of your death benefit insurance to the mortgage lender.
Death insurance tax return: what about it?
People often ask what exactly is the connection between term life insurance and tax returns. Why do you need to report the term life insurance to the IRS? Is that insurance deductible or not? All questions that need answers and you will find them here.
Can you buy out a term life insurance policy?
Buying out a term life insurance policy: it is indeed possible, but it pays to inform yourself sufficiently in advance about the options and conditions with your insurer.
Term life insurance is insurance that gives your dependents a little more financial security after your death. Consequently, many people choose to take out death benefit insurance.
Of course, it may happen that you no longer want death benefit insurance or are looking for another one.
Inheritance tax and term life insurance: what about it?
What exactly is the situation with term life insurance and inheritance tax? Does that tax always apply or are there exceptions?
Death benefit insurance: to take out or not to take out?
Possible consequences if you don't purchase death benefit insurance
It is clear that taking out life insurance is a smart move in many cases, but what exactly happens if you ignore it? Although it is not compulsory in the Netherlands to take out death risk insurance, you obviously won't enjoy the benefits mentioned above either if you don't.
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