What is life insurance and what types are there?
Life insurance is a product that protects you and your loved ones in the event of death or disability . To do this, they guarantee that the debts that you may incur during your lifetime (such as mortgage debts) are paid off and can protect the well-being of the family if income is lost due to the end of work activity and even allow you to take advantage of your savings. Depending on the coverage offered, life insurance is divided into two types: risk life insurance and savings life insurance .
If you want to get one of these policies, but you don’t know which one is most convenient for you, we explain the main differences that exist between the types of life insurance that you can find on the market. Once you know which insurance is best for you, in our life insurance comparator you can compare the different options that companies offer, ordered by price and the coverage that each one includes. You will also be able to find out about the cheapest life insurance of the month thanks to our ranking.
Table of Contents
What is a insurance of life?
Life insurance covers the risk of death or disability , compensating family members or close friends of the insured in the event of an accident, accident or natural death. These policies are usually linked to mortgages, although they do not have to, and have coverage to, for example, double or triple the amount received in the event of death caused by a traffic accident.
However, nowadays life insurance goes much further: they have become very attractive products for, for example, enjoying a retirement without complications , given that many of these policies allow you to withdraw capital upon reaching certain years, along with with the interests that have been generated since its contracting. There are, in fact, specific products for these needs that are similar to pension plans.
What types of life insurance are there?
There are two main types of life insurance: risk life insurance and savings life insurance . Below, we explain what each one consists of:
- Risk life insurance : covers the death of the person and, in some cases, disability or disability .
- Savings life insurance: they combine risk life insurance (that is, with death or disability coverage) and a savings plan. In this type of life insurance, the policyholder, the insured and the beneficiary of the insurance are the same person .
Differences between risk life insurance and savings life insurance
| RISK LIFE INSURANCE | LIFE INSURANCE SAVINGS | |
| What are you offering? | Death and disability coverage | Death and disability coverage and savings plan |
| Can you recover the money before death or disability? | In some products yes | Yeah |
| Are they temporary or lifelong? | Both | Both |
What is risk life insurance and what types are there?
Risk life insurance is life insurance that covers the death of the person, although it may also have disability or disability coverage . If the policyholder dies, the insurance beneficiaries will receive compensation; If you suffer a disability or want to enjoy the insured capital during your retirement, it will be the policyholder who will get the money.
Risk life insurance, in turn, can be of two types : whole life insurance and term life insurance .
Whole life insurance
With whole life insurance, the insured will be covered for life , that is, there is no deadline when the company will stop providing the service. It works like risk life insurance, but also like life savings insurance, since the insured will be able to collect a guaranteed capital (plus interest) from the second year of the policy (or at the time indicated in the conditions. individuals).
As risk life insurance, the beneficiaries may receive the corresponding compensation at the time of the death or disability of the insured. The price of the premium for whole life insurance will always be the same, therefore, it does not take into account the increase in risk as the insured ages.
Term life insurance
With term life insurance, the policy is subscribed for a certain period of time , which is the period for which the insured will be covered. That is, if the insured does not suffer any damage that is covered by the insurance during that time (death or disability), the insurer will not have to pay compensation, so the money invested cannot be recovered.
The premium for this type of life insurance will change over the years, so it is more recommended for young people who are thinking about getting life insurance, since being younger, their premium will be cheaper. .
Therefore, this insurance can be contracted for days (such as travel life insurance), for a few years (for example, for 10 or 20 years from the moment the policy is signed) or up to a certain age, such as 65 years old.
| WHOLE LIFE INSURANCE | TEMPORARY LIFE INSURANCE | |
| What does it consist of? | It is life insurance, that is, the insured will be covered from the moment they take out the policy until they die. Compensation for death or disability will always be collected. | It is temporary insurance, that is, the insured will only be covered for a certain period of time (for example, up to age 70). If during that time you do not suffer any of the covered losses (death or disability), the insurer will not pay any compensation. |
| How long is the insured covered? | Forever. | Only for a while. |
| Who is the beneficiary | The insured or someone else (in case of death). | The insured or someone else (in case of death). |
| Does its price vary depending on the age of the insured? | No. | Yes (increases with age, as the risk also increases). |
| What types of premiums can they have? | Lifetime: the insured will pay a premium for their entire life. Temporary: the premium is only paid for a few years (and, based on that, how much the beneficiary will receive is calculated) |
Increasing: it increases as the age of the insured increases. |
Also Read: Learn How to Compare Life Insurance Quotes with this Easy Guide
What is savings life insurance and what types are there?
Savings life insurance is a type of life insurance that combines risk life insurance (that is, coverage of the death or disability of the insured person) and a savings plan . These policies, also known as survival insurance, usually have the policyholder, the insured and the beneficiary of the insurance in the same person , since it is designed so that, in the event that the contracting party survives at the end of the policy, he can collect the capital guaranteed that you have been saving. This can be done either through a single payment, in which the entire amount of money saved is paid at once, or in periodic payments, equivalent to receiving a monthly salary.
This type of life insurance also allows you to contract coverage in the event of the death of the insured, so, if third parties have been established as beneficiaries , they will be able to collect the corresponding compensation. If the insured did not establish beneficiaries, the compensation will go to those who, according to the will of the person in question, have been designated as heirs.
Individual Systematic Savings Plan (PIA)
The PIAs were created with the main objective of constituting a life annuity for the insured , since, by collecting their plan in this way, the interest generated will be tax-free , as long as it is done – at least – after 10 years of contracting it. . This type of savings life insurance can also be redeemed at once (that is, as total or partial capital), although this does not make much sense because, in that case, you would have to pay taxes on the interest generated.
Insured Pension Plan (PPA)
This type of life savings insurance is similar to a pension plan, since it is used to have savings after retirement . The main difference with these plans is that the capital will be guaranteed (you will always collect the benefit), with a fixed interest that will always give you the same profitability.
Although it is not exempt from taxes (benefits and contributions will be taxed as income from work), it is possible to obtain a tax reduction in the personal income tax base for the contributions made. Its main disadvantage is that the maximum annual contribution is 1,500 euros , which is also the limit by which tax advantages can be obtained, except in certain cases. It can be rescued all at once or periodically.
📍 How to improve the tax reduction in the PPA?
Additional reductions in the personal income tax tax base of up to 2,500 euros can be obtained if the spouse is the policyholder and earns less than 8,000 euros; and up to 10,000 euros if the contributions are made in favor of a family member with a disability.
Individual Long-Term Savings Insurance (SIALP)
This is a savings life insurance that guarantees that the policyholder will recover at least 85% of what was invested, and in which the interest generated will be exempt from taxes , as long as these characteristics are met: maintained the insurance for at least five years and that the annual contribution does not exceed 5,000 euros. The SIALP (whose equivalent in banks is the Individual Long-Term Savings Account, CIALP) can only be redeemed in full and as capital , that is, it does not admit partial redemptions and the money saved will be paid in one go.
Also Read: Things To Keep in Mind When Purchasing the Best Term Life Insurance
Differences between different types of life savings insurance
| INDIVIDUAL SYSTEMATIC SAVINGS PLANS (PIAS) | INSURED PENSION PLANS (PPA) | INDIVIDUAL LONG-TERM SAVINGS INSURANCE (SIALP) OR SAVINGS PLAN 5 | |
| What does it consist of? | They are savings insurance policies that allow the policyholder to collect an annual annuity if he or she reaches a certain age alive. | They are savings insurance policies designed to complement the retirement pension (similar to a pension plan), but in their case, profitability is guaranteed | They are savings insurance policies designed for the medium term, with a minimum period of five years to recover the investment and that guarantee that the policyholder will recover at least 85% of what was invested. |
| When can they be removed? | Whenever | After retirement | Whenever |
| Maximum annual contribution (€) | 8,000 | 1,500 | 5,000 |
| Total maximum contribution (€) | 240,000 | No total limit applies | No total limit applies |
| How can you charge? | 1. As an annuity 2. As a total or partial surrender |
1. In a single payment 2. In the form of periodic income 3. Combined: one part in a single payment and the other, in periodic income |
1. In the form of capital (a single payment) 2. As a total redemption |
| Requirements to enjoy your tax advantages | 1. That it is collected as an annuity 2. That at least 10 years have passed since contributions began to be made |
1. Do not contribute more than 8,000 euros annually | 1. That at least 5 years have passed since contributions began to be made 2. That no more than 5,000 euros are contributed annually |
| Can it be rescued ahead of time? | Yes, a total or partial redemption can be made (in that case, the tax advantages are lost) | No. It can only be redeemed at the time of the insured’s retirement. | Yes, a full (not partial) redemption can be made, but the tax advantages will be lost |
| Taxation of contributions | They are taxed in personal income tax. | Tax reduction in the personal income tax tax base with a maximum of 1,500 euros per year or 30% of income from work and/or economic activity.
Additional reductions of up to 10,000 euros for contributions to family members with disabilities and 2,500 euros for contributions to a spouse with income of less than 8,000 euros. |
They are taxed in personal income tax. |
| Taxation of benefits | Only part of the lifetime pension is taxed (the percentage that will be taxed depends on age and is reduced the older the insured is). The income that has been generated since its hiring is exempt from paying taxes. | They are taxed as income from work (the same treatment as salaries or unemployment benefits). | Interest is tax-exempt (if redeemed after five years of contract). |
Who’s who in life insurance
Now that you know the types of life insurance that exist , it is necessary to be clear about who are the people who will be included in a policy of this type. These actors are four: the insurer, the policyholder, the insured and the beneficiary of life insurance.
- Insurer : is the entity to which the premium is paid and which is responsible for paying the compensation when the time comes. In life insurance, the insurer would be each of the insurance companies with which you can take out a policy. Although you can choose the company you want to purchase this product -as long as your characteristics agree to cover you-, if you are going to take out life insurance with your mortgage in order to improve its conditions, you may have to do it through your bank.
- Policyholder : refers to the person who contracts the insurance . In most cases it coincides with the insured, since a person usually takes out life insurance for themselves, but the situation may arise in which the insured is someone else. For example, if you want to take out life insurance for a third party (such as your partner or your child), you will be the policyholder, while that third party will be the insured.
- Insured : is the person on whom the risk falls , in the case of life, death or disability insurance. The policyholder can take out a policy for himself (so he would also be the insured) or take it out to insure the life or property of a third person.
- Beneficiary : The beneficiary of life insurance is the person who will receive compensation in the event that the insured suffers any damage covered in the policy. In the case of death insurance, the beneficiary, logically, cannot coincide with the insured. However, in the case of disability or disability insurance, the insured and the beneficiary can be the same person. For example, if you take out life insurance for yourself that compensates you in case you suffer disability due to a traffic accident.
