Day 7: Life insurance, taxes, and other opportunities

A life insurance policy is a contract between you and an insurance company. You make regular premium payments, and in return for this, the insurance company pays a lump sum (called a death benefit) to your beneficiaries after your passing. They can then use that money for the purpose of their choosing, such as to pay day-to-day bills, make a mortgage payment, or finance their child’s college. With the safety net of life insurance, you can be sure that your family keeps the house and can pay for things you (personally or all together) have planned on after your passing.

Advantages

Those you leave behind are taken care of after your death.
Life insurance is handled more favorably with regard to taxes than any other financial instrument.
Death benefits are generally exempt from the beneficiary’s income tax.
Under certain circumstances, death benefits can be exempt from inheritance tax.

Disadvantages

Lack of control over the investment and low returns with many providers. With whole life insurance, the insurance company invests your premiums at its discretion. If you’ve had some practice investing and are happy to take on some additional risk, you might get a higher return by investing the money yourself.
They are inflexible due to their long terms.
A physical examination is almost always required.
Another reason for higher costs is that insurance agents usually receive higher commissions for selling life insurance policies than for other policies…which could also explain why permanent policies sell better.

Retirement and taxes

In Germany, the capital gains tax is 25%. If you invest in ETFs, for example, you always have to keep it in the back of your mind that taxes will have to be paid if you sell your investments or when you withdraw your money or cash it out. So if you take out a certain amount each month or quarter, that means you have to factor in the 25% tax rate.

Why it might be wise to establish a limited liability company (GmbH) or a holding company

The next question is how best to set yourself up in terms of taxes. For example, in Germany, the opportunity is out there to establish a limited liability company or a holding company. This is a vast topic, which you can learn more about in other courses. This is just to hint that there are some good ways to optimize how your investments get taxed.

Now what?

Now you know the different paths to a secure financial future! Having more than one source of income as a retiree can be a wonderful thing. We invite you to set clear financial goals for your future, including for your retirement. And then figure out if, in your personal financial situation, you can work up to having not only a government pension (which you now know won’t be enough), but also a corporate retirement plan and your own investments! And as soon as possible, at that. Thinking about tomorrow will make you feel better today. By signing up here for Vitamin, you can develop an image of how to achieve your personal retirement goals and what exactly you need to get there.