There are different kinds of life insurance: guaranteed-interest life insurance (class 21) and investment-type insurance (class 23). These life insurance policies are therefore not just an insurance policy, but also a savings and investment solution. The big difference between the two is that a class-21 product comes with limited risk and guaranteed interest on every deposit made over a set period, while a class-23 policy is invested in underlying funds. An investment-type insurance policy offers a chance of a higher return, but of course this is not without risk. The life insurance component is largely similar for both products, however, as each can be used for inheritance planning.
Please read on to find out what you can do with a life insurance policy when it comes to inheritance planning.
Your money is quickly accessible after your death
In the event of your death, your accounts and those of your partner will be blocked. Before they are released, the tax authorities or the notary-public must assess whether you or your heirs owe any social security debts. The accounts will remain blocked for the duration of this procedure. However, if you name your partner or another person as a beneficiary of a life insurance policy, then the money from that policy will become available more quickly after your death.
Alternative to a will
In the event of your death, your assets will not necessarily be passed on automatically to your partner (for example, if you are not married). In this case, a class-21 guaranteed-interest life insurance policy or a class-23 investment-type insurance policy offer an attractive solution. They allow you to easily name a beneficiary, such as your partner or your children. You can also modify your choice at any time.
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Inheritance tax is based on a graduated rate: the greater the value of the assets, the likelier they are to fall into the higher brackets and the more inheritance tax your next of kin will have to pay. If you share your assets among several people, a greater proportion of your assets will fall into the lower brackets and this will result in savings. This can be done by leaving a share of your assets to your grandchildren in the event of your death via a class-21 guaranteed-interest life insurance policy or a class-23 investment-type insurance policy. In many cases, your grandchildren will also benefit from an inheritance tax reduction, meaning that a double saving can be made.
Inheritance planning through making gifts
One commonly used inheritance planning technique is to make gifts. You will then only be liable for gift tax, which is lower than inheritance tax.
When you make a gift, however, you want to make sure that the gifted assets will not be badly managed. A controlled asset transfer (via a life insurance policy) leaves you with plenty of say in what happens to your asset. You will retain this control over the contract and the beneficiary for as long as you live.
Extra protection through supplementary death cover
In order to insure your family or your partner against the financial consequences of your death, you can supplement the capital you have accrued in your life insurance policy with a certain additional amount, provided that you have medical acceptance and you pay the risk premiums. You can do this in the following ways:
- You want to leave a minimum amount of capital to your beneficiaries, regardless of any changes on the stock exchange or to your assets. In this case, you can opt for a supplement up to the desired amount.
- A percentage-based death cover is also an option. In the event of the insured person's death, the reserve is then topped up by a certain percentage. This is very useful when it comes to paying any inheritance tax owed.
- You can also protect your next of kin financially in the event of your death as the result of an accident. You always get to specify who the accumulated assets should be paid out to, and you can also modify the supplementary cover over the course of the contract.
However, you should take into account that supplementary cover entails additional costs and may require a favourable medical acceptance.
Every product comes with its own tax treatment. A premium tax usually applies to insurance products, while tax on stock exchange transactions is payable on financial products such as investment funds and shares. Your returns are also often capped by means of a withholding tax. With a class-21 guaranteed-interest life insurance policy or a class-23 investment-type insurance policy with (partial) capital protection, you only pay withholding tax if you redeem your contract within the first eight years.
Certain other savings-linked insurance policies are also eligible for tax savings, such as pension savings or long-term savings.