Life insurance – common myths debunked

Myth 1: life insurance only covers death

No, you can also take out life insurance to cover incapacity for work and agree a waiver of premiums. If you have a waiver of premiums, the insurance company will pay your premiums if you are unable to work due to illness.

There are basically two types of life insurance: standard term life policies only pay out if an insured risk – i.e. the death or disability of the policyholder – occurs during the term of the agreement.

Endowment insurance covers the risks of death or incapacity for work but includes a savings element to provide a pension. This means that with endowment insurance, you still benefit from the premiums you have paid even if the insured risk does not occur.

Myth 2: there is a lack of transparency

A common criticism of life insurance is the lack of transparency with regard to the use of the premiums. However, the cost of the insured benefits is clearly stated. Furthermore, life insurance providers must disclose full details of surrender value, fees, forecasts, insurance conditions and so on if requested to do so.

Myth 3: life insurance is not flexible

This is not true. Life insurers have evolved to meet the needs of their customers by making their policies more flexible. Most policies now include simple options for adjusting the premium price and time of payment as well as adding different insurance components.

Myth 4: if I take out life insurance, I will be tied in forever

It is true that life insurance generally involves a long-term commitment. However, this does not mean that if you take out a policy you are tied to it for all eternity. You can usually cancel both standard term life polices and endowment policies after a minimum contract period – but see myth 5, below.

In addition, you can withdraw savings from pillar 3a under certain conditions, such as to buy a home you will live in yourself. However, in this case, it is often more beneficial to borrow against your life insurance policy than to withdraw a lump sum.

Myth 5: if I cancel my policy ahead of time, it will cost me dearly

This can often be true. You can usually cancel standard term life policies after the minimum contract period without incurring any additional charges. However, this is not the case for endowment policies. Whether you will lose out financially from cancelling such policies ahead of time depends on how long you have had the policy.

In the early years, the premiums pay for the insurance agent’s commission and administration charges first. It is only after that that wealth starts to accumulate. Therefore, during the initial years, the surrender value of an endowment policy is zero. However, if the investments perform well, you can withdraw from the policy after 10 to 15 years and still have some financial benefit.

The best thing to do is work out in advance how much cancelling will cost you after 5, 10 and 20 years – before you take out the policy.

Myth 6: life insurance is just for families

No. Single people can also benefit from a life insurance policy. Taking out cover for incapacity for work makes sense for young adults too. Young policyholders also benefit from a cover extension guarantee. This means that they can increase their cover if certain events occur, such as marriage or the birth of a child, with no questions asked. Self-employed people, who often have no second pillar, would also benefit from a life insurance policy to cover incapacity for work.

Endowment insurance with a savings element is worth taking out irrespective of marital status to close any pension gaps in the first and second pillars. Of course, a pillar 3a policy is useful for anyone as you can deduct the contributions from your taxable income.

Myth 7: I am obliged to keep paying life insurance premiums even if money is tight

Yes and no. If you take out life insurance, you are committed to paying premiums regularly over the long term. If you lack discipline when it comes to paying into the third pillar, it may be helpful to be “forced” to save in this way. However, if money is tight at some point, life insurance premiums may become a burden. In addition, if you stop earning income subject to old-age and survivors’ insurance (OASI) contributions, you may not pay into pillar 3a at all.

Many providers now allow their policyholders to take payment holidays. Note that such payment holidays are usually only permitted from the second insurance year onwards. There are significant differences in the maximum duration of the payment holiday and what is covered during this period.

Summary: it pays to compare

The question of whether you need life insurance and what type depends on your personal situation. What is clear is that the payout from the first and second pillars is not usually enough to maintain your standard of living after retirement. It is therefore all the more important to take out a private, third-pillar pension.

Are you prepared to commit yourself to regular payments over the long term or would you even appreciate being forced to save? If so, you should consider taking out an endowment policy. This allows you to save for retirement and ensure that certain risks are covered at the same time.

But it is worth taking a close look at a range of products from different providers. In particular, check exactly what is covered (including during any payment holiday), the surrender value and how flexible the policy is. The experts at Comparis partner service Optimatis will be pleased to help you find the right solution.