What is life insurance for?

“There are three kinds of life insurance,” says Nicolas Dubois, who helps develop the bank’s protection products. “With term life insurance, the insurer pays an agreed amount to a designated beneficiary if you die before the end of the policy. With pure life insurance, you receive an agreed sum on an agreed date (for example, when you retire). Generally, though, people take the third option, i.e. an endowment policy, in which the insurer pays you a sum of money on the agreed date or, if you die prematurely, pays money to a given beneficiary.”

Protect your loved ones

By taking out term life insurance or an endowment policy, you’re protecting your loved ones from financial worries. If you die prematurely, they will receive a fixed amount of money. This will enable them to maintain their living standards as far as possible, fund important activities for your children such as university study, or support them as they start their adult lives. You can also arrange for your descendants to receive a sum of money to cover the inheritance tax on your estate.

Protect yourself

“A life insurance or endowment policy is a good way of supplementing your pension,” says Nicolas Dubois. “It will help you replace some of the income you lose when you retire. The premiums you pay build up over time, and when the policy matures – generally, at your state pension age – you receive the money. Depending on your policy, you can choose to receive a lump sum or an annuity, i.e. a regular income for the rest of your life.”

Pay less tax

Life insurance policies bring with them tax benefits. Subject to certain conditions, the premiums you pay are tax-deductible so they are a tax-efficient way of building up your long-term savings or pension pot. The exact benefit depends on the premiums you pay and any other pension or long-term savings products you may have.

If your life insurance premiums were deducted from your taxable income, the money paid out when the policy matures, or when you die, will be subject to a one-off levy. The amount of that levy will depend on when you receive the money and when you paid the premiums.

Protect a gift

Life insurance offers another, less well-known benefit. “Term life insurance can also be useful if you want to give away money while avoiding gift tax,” says Nicolas Dubois. “If you die within three years of making the gift, the gift is regarded as part of your estate and so the recipient has to pay inheritance tax on it. With term life insurance, the beneficiary will receive a sum of money to cover that inheritance tax. However, the benefits of using term life insurance in this way can vary. It’s best to discuss the matter with your relationship manager, who will be able to examine your personal situation and give you the best advice.”

Plan your inheritance

A term life insurance or endowment policy can also help you plan what happens to your assets when you die. They can be used to ensure that your grandchildren receive some of your estate, allowing you to skip a generation. During your lifetime, you can also give away some of your assets through a controlled transfer linked to a life insurance policy. This means that you retain control over the assets, and over the allocation of those assets, until you die. Ask your solicitor for more information.

About Ask Your Bank

At BNP Paribas Fortis, we want to help you gain a greater understanding of money matters, which is why we asked more than 1,000 Belgians what their main money-related questions and concerns are. With the Ask Your Bank series, we aim to make your life easier by addressing those matters in a fully transparent way: another example of Positive Banking.