What is term life insurance?
If someone in paid employment dies, their partner and children receive a survivor's pension. This is not the case for independent entrepreneurs. If you die, your family is not automatically entitled to such a benefit. Do you want to make sure that your family will not get into financial trouble when you die? Then it is sensible to take out a term life insurance policy. With a term life insurance policy, your partner and children will receive a predetermined amount in the event of your death.
How does a term life insurance policy work?
You can insure yourself in various ways.
Level term life insurance
With a level term life insurance policy, you are insured for a fixed amount at a fixed premium for the entire term. That means it make no difference whether you die early on or only at the end of the term. The amount that your surviving dependents will receive will always remain the same.
Linear decreasing term life insurance
With a linear decreasing term life insurance, the amount that your surviving dependents will receive decreases each year by a fixed amount. The premium you pay also decreases. This form is especially interesting for older self-employed professionals: the older you get, the less your dependents’ need for benefits.
Annuity decreasing term life insurance
The amount that your dependents will receive also decreases with an annuity-based decreasing term life insurance policy. The amount decreases less rapidly at the beginning of the term than at the end. Your premium also decreases during the term. The annuity decreasing term life insurance is often taken out in combination with an annuity mortgage.
Read the policy conditions
What is covered and what is not depends on your insurance company. And on the conditions of your insurance policy. Always read the policy conditions carefully. You can ask an independent insurance advisor for advice.
Duration of term life insurance
You can choose between a temporary or a lifelong insurance.
This will be paid out if you die within the agreed term. For example, a term life insurance that is linked to a mortgage. Of course, a mortgage always has a certain term.
An end date has not been determined for this type of insurance. The insurance will always pay out in the event of your death.
What does term life insurance cost?
The premium you have to pay depends on a number of factors. First of all, on the amount that your dependents would receive in the event of your death. But also on your age and health at the time you take out the insurance. It is possible that your situation changes during the term of the insurance to such an extent that you have to adjust the coverage upwards or downwards. Keep this in mind. Premiums for term life insurance are not tax deductible.
Do you pay the premium from your own equity? In that case, the payment to your surviving dependents is part of your inheritance and falls under the rules for inheritance tax (in Dutch). In some cases, the surviving dependents benefit is not part of your inheritance. This depends on who is listed on the policy as the policyholder and how your partnership is recorded. Premiums for term life insurance are not tax deductible. Your surviving dependents must pay inheritance tax on the benefit they receive from the term life insurance policy. Whether this is mandatory depends on the prenuptial agreement, but also on who is listed on the policy as the policyholder.
Alternative to term life insurance
You can also compensate for the loss of your income for your dependents by providing a financial buffer. You can do this by, for example, saving or investing. Of course, you can also combine a financial buffer with a term life insurance policy.