Life insurance: protect your children properly

For many families, when a parent dies, it is not only a psychological but also a financial blow. This is particularly the case if the main breadwinner suddenly disappears or loans have to be paid off after death before your child can stand on its own two feet financially. So that the partner and the children do not get into financial difficulties, many parents take out life insurance.

Does life insurance make sense to provide for children?

Life insurance, especially term life insurance, makes a lot of sense for families with children. In the event of death, not only is the remaining partner financially supported, but the financial future of the children is also secured with life insurance. Life insurance makes sense above all if one parent is the main breadwinner or has a job that involves a particularly high risk of accidents. The right time to take out life insurance is when your children are too young to support themselves or when you have taken out a larger loan, for example to buy a house.

If you want to protect your children with life insurance, you can choose between basic term life insurance, which occurs in the event of death, and extended endowment life insurance, which combines term life insurance with a savings plan .

Term life insurance: protect children in the event of death

With this type of life insurance, you can protect your children financially in the event of your death. At the beginning of the life insurance, you determine the term and the amount of the insurance sum, which will only be paid out to your children if you die during the contract period.

• Term: The terms of term life insurance vary between three and 45 years. After this period, you can take out new life insurance to continue to protect your children.
• Insured amount: The amount of the insured amount of a life insurance is recommended by Stiftung Warentest, among others, to set three to five times the annual gross income, depending on the age and number of children. The sum insured can be used to cover the funeral costs on the one hand and to take care of the surviving family on the other. If there are still open loans after the death of the insured person, the children do not have to bear the costs, because then the life insurance covers the insured person. However, the insured sum is not paid out if the insured person commits suicide within the first three years of the term.
• Insurance premium: The premium that has to be paid monthly or annually to the life insurance company to support your children financially in the event of a death depends on the amount of the insurance sum, the term and the age, gender and state of health of the insured person. As a rule, the contributions for men, smokers and older people are higher than for women, non-smokers and young people.
• Health check: With term life insurance, a health check is carried out using a questionnaire that you must fill out truthfully. Anyone who lies when answering the questions jeopardizes the security of their children, because then the life insurance company can refuse to pay out the sum insured and withhold premiums paid.
• Tax: The insurance premiums can be deducted from the tax under “Special expenses”. When life insurance is paid out in the event of death, an inheritance tax may apply if the allowance of EUR 500,000 for married couples, EUR 400,000 for children and EUR 20,000 for unmarried couples is exceeded. However, you can avoid inheritance tax if you or your partner insure each other. If the insured person then dies, the person who took out the life insurance receives the money without tax deductions.

Endowment life insurance: save for children

Capital-forming life insurance not only protects your children in the event of your death, but also serves as an opportunity to invest money profitably for your children with a permanent guaranteed interest rate.

• Sum insured: In contrast to pure term life insurance, the sum insured with endowment life insurance is not only paid out to your children upon your death, but also when you live to see the end of the contract.
• Insurance contribution: The cost contributions of an endowment life insurance are higher than those of a simple term life insurance. In addition to the insurance benefit in the event of death, the costs of managing the money must also be taken over. Interest is only paid on part of the fees paid, while the rest is used to cover costs, for example for commissions or closing fees.
• Tax: If you took out capital-forming life insurance for your children after January 1, 2005, you must pay a withholding tax on the sum insured. Whether the entire amount of the sum insured or only half of it has to be taxed depends on the age of the insured person and the length of the term: If the insured person is older than 60 years at the end of the contract term or the term is already at least twelve years, only the Half of the sum insured is taxable. If the insured person is younger or the term is less than twelve years, tax is due on the entire sum insured.
• Termination: You can also terminate life insurance early, for example if you have found a more profitable alternative to saving for your children. If you withdraw from life insurance early, you will receive the surrender value that is contractually agreed and increases the longer you have paid into the insurance.

You can find help and templates to cancel your insurance properly and easily at FOCUS Online.

The idea of ​​combining capital-forming life insurance, survivor’s provisions and financial investments is very advantageous. However, capital-forming life insurance is not necessarily the best way to save money for your children: On the one hand, there are high administrative costs and on the other hand, the guaranteed interest rate, which has only been 1.75% since the beginning of 2012, is higher compared to the interest rate of other investments low. If you cancel before the end of the term, it is often the case that the surrender value does not correspond to the amount of the contributions paid due to the high processing and cancellation fees. Then life insurance as an investment for your children is more of a loss-making business.

Alternatives to life insurance as an investment for children

Capital-forming life insurance does not always offer the best opportunities to invest money profitably for your children. Therefore, when it comes to life insurance, it makes sense to separate investments and provisions for children left behind after death. It is recommended, for example, to take out simple term life insurance in combination with a separate investment fund savings plan. Because with the latter you are more flexible and higher returns can be obtained in the medium to long term than with endowment life insurance. With an individual composition of life insurance and investments, your children are not only protected in the event of your death, but you can also achieve higher returns for your children than with a capital-forming life insurance.