Term Life Insurance: What You Need to Know

Discussing term life insurance can feel like addressing the "elephant in the room." Is your estate large and liquid enough to support your family if you were to pass away? This combination of size and liquidity often presents challenges.

In some households, there are two incomes; if one is lost, at least one remains. But what if the one lost covers all the fixed expenses, including housing? This situation could force survivors into drastic actions, like moving house almost immediately—a terrible thought.

Life insurance can serve as a savings tool (where premiums are invested and a sum is received at a future date if you’re still alive) or as a risk mitigant (where the named beneficiary receives a sum if you die before a certain date). The latter is term life insurance, the focus of this article.

Part of the Plan

We always advise insuring only those financial risks you can't bear. If you can cover a temporary or structural loss of income, don’t waste money on insurance premiums.

Sometimes, clients can afford the financial loss but not at any given moment. Timing can be crucial, especially for homeowners who may need time to free up money.

You should also consider entitlements from state or employer insurance. As a Dutch taxpayer, you contribute to the Survivor Pension, which provides temporary income under certain conditions and can reduce the need for additional insurance. Another example is funeral insurance, a term life insurance that covers funeral expenses. While it's not a large sum, it eliminates an unwelcome expense spike at a critical time. Many parents start this insurance for their children, who often continue it into adulthood. If you have this insurance, don’t duplicate coverage.

Financial planners are equipped to run scenarios to identify potential financial gaps. We create a base case and consider what happens if you or your partner dies. This process is useful for everyone, revealing vulnerabilities so you can take necessary actions.

Important Aspects of Term Life Insurance

Dutch term life insurance is monitored frequently, and for a good reason because there are frequent changes in insurer behavior. Insurance prices have dropped, but at the expense of service. Stricter terms for accepting insured risks have emerged. There are fewer fixed-fee products.

Significant differences in coverage and terms, such as:

· Differences in temporary coverage before final acceptance by the insurer

· Acceptance of recovered cancer patients

· Early policy payout for terminal illness diagnosis

For couples with separate estates (under prenuptial agreements) where one partner pays the premiums for the other's term life insurance, the proceeds are kept outside the inheritance for tax purposes. This Dutch tax rule can direct significantly more inheritance (up to 20%) in the right direction.

Finally

The Dutch tend to over-insure. Avoid this mistake by making informed decisions to achieve the desired outcomes of your financial plan.