Endowment life insurance is one of the classic forms of insurance in Germany and remains very popular with many consumers. But what is actually behind this term and how does endowment life insurance work?? In our two-part article, we want to give you an understandable insight into the subject and show you what you should look out for when taking out a traditional endowment policy.
But before we get into the details, let’s explain the concept of life insurance in more detail. Life insurance is an insurance policy that secures the life and the working capacity of the insured person. If death or disability occurs during the policy term, the insurance kicks in and pays out a pre-agreed amount of money. In addition, the classic endowment insurance is a form of investment in which part of the premium paid goes into a savings portion. Find out exactly how this is made up and what the advantages and disadvantages of endowment life insurance are below.
Read on to gain a deeper insight into traditional endowment life insurance in Germany, how it works, what it means and how you can find the ideal insurance policy. You may have considered purchasing an endowment policy in the past, but are still unsure if this is the right decision. With our article, we want to help you make an informed decision and get you started on the topic.
Understanding Classical Endowment Life Insurance in Germany Correctly Part I
Endowment life insurance is a long-term form of savings used by many people in Germany. Unlike other forms of insurance, which focus on risk protection, endowment insurance combines risk protection with a form of savings.
The classic endowment life insurance in Germany has a certain contract term and when the contract is concluded, a one-time sum is fixed, which is paid out to the surviving dependents in the event of the death of the insured or is paid out to the insured as a lump sum when the contract expires.
A major advantage of the classic endowment insurance is the guaranteed interest rate, which applies over the entire contract period. In addition, a surplus participation is often offered, which depends on the insurance company. Another option is the return of premiums, where the paid-in premiums are paid out in full at the end of the contract if the insured is still alive.
- This makes the classic endowment life insurance interesting:
- Saving money with daily protection
- Guaranteed interest over the entire term
- Surplus participation and premium refund possible
However, it is important to note that classic endowment life insurance is a long-term form of savings and therefore only becomes lucrative after a few years. There are also high costs and commissions, which are often not presented transparently when the contract is concluded. Tax rules on payouts can also be complex.
In Part II, we will look further into the classic endowment life insurance in Germany and consider the advantages and disadvantages in detail. It is important to be well informed before taking out a contract and to weigh up all the pros and cons in order to make a well-informed decision.
Basics of endowment insurance
An endowment insurance is an insurance where you save a certain amount of money and get paid out after a certain period of time. But how does it work exactly?
When you take out an endowment policy, you make a regular premium payment. This is invested by the insurance company in a savings plan. Interest and possible profits are credited, but costs and fees are also deducted.
At the end of the insurance term, the saved capital is paid out. However, final withholding tax is still due on this sum. If one dies during the term of the insurance, the beneficiary receives the sum insured.
- The benefits of an endowment policy:
- The possibility of saving money
- Protection of the family and dependents in the event of death
- Tax advantages with a long term
However, you should be aware that endowment insurance is a long-term investment and withdrawing prematurely can be expensive. In addition, returns are often not too high in the current low interest rate environment.
It is therefore worthwhile to weigh up well whether endowment life insurance is the right choice and to be clear about the exact conditions and terms of the insurance policy.
Overview of the different types of endowment life insurance
An endowment policy is an insurance policy that combines both protection in the event of death and the saving of capital. There are different types of endowment policies, which vary in benefits and conditions.
The classic endowment life insurance
The classic endowment insurance is the oldest and best known form of endowment insurance in Germany. Here, the insured pays monthly or annual premiums, which are specified in an insurance contract. In the event of the death of the insured, the agreed sum is paid out to the dependents. If the contract is held until the end of the term, the insured receives the paid-in premiums plus interest back.
The fund-linked endowment insurance
With unit-linked endowment insurance, a portion of the premiums is invested in investment funds. The insured thus assumes a higher risk, but also a higher expected rate of return. Here, too, in the event of death, the agreed sum is paid out to the dependents or, at the end of the contract, the insured receives the premiums paid in plus the income from the funds.
The flexible endowment insurance
With flexible endowment life insurance, the insured is much more flexible in the design of the contract. He can adjust the premiums at any time or even withdraw prematurely. However, the conditions are still somewhat unclear, since it depends here also on the conclusion of the contract.
All in all, when taking out an endowment policy, one should always inform oneself in detail about the various benefits, conditions and costs and make one’s decision accordingly and thoroughly.
Advantages and disadvantages of endowment life insurance
Endowment life insurance is a type of insurance that is often used as a retirement provision. As part of this insurance, policyholders usually take out a term of several decades, during which they pay money into the insurance regularly. At the end of the term, the saved capital is paid out or paid out as an annuity.
One of the greatest advantages of endowment insurance is financial security in old age. Due to the regular payments, a high capital sum is saved, which enables a much higher pension in old age. In addition, endowment life insurance policies are often tax-privileged, which leads to a higher yield.
One disadvantage can be that endowment insurance is often difficult to calculate due to its long term. In addition, the capital is often tied up and cannot be paid out early. In the event of premature termination of the insurance policy, losses may also be incurred.
- Advantages of endowment insurance:
- – Financial security in old age
- – High capital sum
- – Tax benefits
- Disadvantages of endowment life insurance:
- – Difficult to calculate
- – Capital often fixed
- – Losses possible in the event of premature termination
The classic endowment life insurance is still a popular form of provision in Germany. But many consumers don’t understand exactly how this type of insurance works and what its advantages and disadvantages are. In Part I, we looked at what the components of traditional endowment insurance are and how they differ from other forms of insurance.
- Endowment insurance premiums consist of a savings component and an insurance component. The savings portion is used to accumulate a capital that is paid out at the end of the policy term. The insurance portion covers the risk of the policyholder dying before the end of the policy term.
- Compared to other forms of savings, the return on investment for endowment life insurance is rather low. Also, the costs associated with taking out and managing the contract are very high.
- Endowment insurance is most suitable for people who are looking for a secure form of retirement planning and are not willing to take major risks.
It is important that consumers inform themselves thoroughly before taking out endowment insurance and are aware of the advantages and disadvantages offered by this form of insurance. In the next part, we will look at what alternatives there are to classic endowment life insurance and what consumers should look out for when choosing a particular form of insurance.