What is Life Insurance and How Does It Work? | Meaning/Benefits & Types
Life insurance is mainly used nowadays as a contract to save money by benefiting from the advantages of the taxation of life insurance combined with those linked to the transmission of heritage. The contracts are opened with the aim of preparing for retirement, building up capital over time, or anticipating a real estate project.
However, a distinction should be made between death insurance and life insurance. In a death insurance contract, the insurer undertakes to pay a fixed capital or annuity to the beneficiaries designated by the insured in the event that the latter dies before a certain date. Death insurance is generally taken out to allow the family to repay a loan or to pay for the children’s studies if the insured dies suddenly.
- In the event of the life of the subscriber, he remains the beneficiary and holder of the funds and can freely recover the capital and interest.
- In the event of the death of the subscriber, the contract will be settled and the capital and interest will be transferred to the beneficiary(ies) of their choice (children, spouses, partner, brothers, sisters, etc.)
A unit of account (UC) designates investment support on a life insurance contract that does not offer a capital guarantee. The subscriber can invest in different asset classes through units of account such as stocks, bonds, and real estate. A UC can have a negative return in the event of a fall in the financial markets, which generates a capital loss for the subscriber (loss of part of the capital invested).
Stocks and bonds are grouped together in undertakings for collective investment in transferable securities (UCITS). There are many forms of UCITS (monetary funds, bonds, shares, alternative funds, formula, and diversified funds).
Behind the term UCITS there are two distinct legal statuses:
- SICAVs (Investment Companies with Variable Capital)
- FCPs (mutual funds)
Finally, we can cite trackers (listed index UCITS) whose performance replicates a financial index (the CAC 40 for example).
For real estate, there are many supports such as:
- SCI (Real Estate Civil Society)
- SCPI (Civil Real Estate Investment Company)
- OPCI (Undertaking for Collective Real Estate Investment)
The expected rate of return on the units of account is higher than on the fund in euros in return for a capital risk.
Subscription to a life insurance policy
There are several categories of fees:
- Entry fees and fees deducted from each payment: these fees can vary from 0% to 5% depending on the contract.
- Management fees: these correspond to the remuneration of the insurer. They are calculated on the totality of the accumulated savings. It takes on average between 0.5% and 1.5% for unit-linked contracts. A distinction is made between the management fees on the euro fund of the life insurance company and the management fees on unit-linked supports.
- Arbitration fees: the fees are deducted from the number of sums transferred from one fund to another. In some contracts, these costs can reach 1% of the amounts arbitrated.
