Is a life insurance worth it?

We always hope it’s a waste of money
It’s true, a life insurance is something you hope you never need, but would be grateful for having it once you do. If you are young, this topic usually never crosses your mind. “I am 25 years old, what do I need life insurance for?” Well the life insurance is not for you, it is for those who you are leaving behind.

Also think about what you’re leaving behind. Do you have a study / college debt? A mortgage? A partner? Kids? Or perhaps you are planning for this. In these situations, a life insurance can suit you. We don’t stand still and think about what could happen in our daily lifes. You can be in a car crash, or a fire. Accidents happen, and you can not control them.

On top of that comes our health. Perhaps now you feel as strong as ever, but who knows what happens years down the line. Cancer, ALS, heartdisease happen to young people as well, and none of them have signed up for it.

I am alone, and I don’t have any debts to leave behind
You are probably not planning to stay alone. You can wait with these kind of important decisions when you need it, but what if by the time you are married with kids, you have developed some illness like diabetus, obesity or some blood disease. These things don’t necessarily kill you, but they do prevent you from getting life insurance! Or maybe they will insure you, but for a much higher tariff, and not the amount you want to insure.

If you were to get a life insurance policy today, still healthy, you can develop any kind of illness during the contract, and this doesn’t have to be disclosed with the insurance company. It’s all part of the risk factor that they keep into account. Around 7% of people get diabetus at some point. That 7%, is calculated in the premium. Do you already have diabetus and you apply for insurance? Well that 7% turns into a 100%, making your premium much higher.

So there’s nothing wrong with getting at least something early on. A smoking person who wants to insure €100.000 for the next 50 years: would cost €16,76 per month. Non-smoking: €7,44 per month. The life insurance can also aways be canceled after the first year. This however wouldn’t be a smart move.

How does it work?
Let’s take as an example Jeroen, who is 25 years old and is a smoker. In order to insure €100.000 (one-time pay out) for the next 40 years, it would cost €9,76 per month. The insurance companies make use of public “death tables”. It’s quite straightforward: per age group: how many people have died in the past years. In 2021, 346 people in the age category of 20-25 have died in the Netherlands. In 2021, there were 1.326.154 people in the age category 20-25. So of them, 0.0026% have died. Lets make it 1.3 million.

If 1.3 million people all take a life insurance, of €100, and the insurance company “knows” that 346 of them will die, they also know they will have to pay €34.600 in that year. Let’s give that a 20% overhead costs, and 20% profitmargin. The insurance company will need €50.000, just for those of 20-25 years old. Each insured person will then pay roughly €26 for these 5 years (€0,43 per month)

This is just an example, it is not possible to take in insurance for €100. Also minimum premiums usually are at least €1,50 a month, to cover the costs.

Now imagine the same methods for the people between 50-55. In this category, there are more deaths obviously. So the insurance fee will also be higher. If you were to take a life insurance from 25 years on, for the next 40 years, the monthly premium will be the same. So your 25 year old self is paying partially for your 50 year old self. Example:

Jeroen is 25 years old. These are the differences in monthly premiums of life insurance for €100.000:

For 10 years: €1,91 (+€1,03 for smokers)
For 20 years: €2,49 (+€1,65 for smokers)
For 30 years: €3,61 (+€2,48 for smokers)
For 40 years: €5,55 (+€4,21 for smokers)
For 50 years: €7,44 (+€9,32 for smokers)

The longer the insurance, the more it will cost. So those might seem unappealing, but it also means that you’re safe for most of your life. In the duration of the life insurance, you don’t have to disclose any new medical developments

Does lfe insurance also pay out if I don’t die?
That is optional. Like I mentioned above, the 25 year old is paying for his 55 year old self already. So in the first 25 years you pay too much, and in the last 25 years you pay too little. If you were to cancel the policy after 15 years, you have built up a sort of savingsaccount, which was supposed to pay part of the premium of the last 25 years. That savings account can be paid out to you. It’s not significant, but it is something.

However if you’re looking into something to retire with, it would make more sense to look into pension products / investments.

Costs?
Life insurance comes free with a mortgage advice/mediation, because they are very intertwined. Without a mortgage the costs for a life insurance is €50 without advice, and €150 with advice. Advice includes also guidance, explaining, helping with establishing the actual amount you really need, so you don’t overpay.