Many people identify life insurance as a product that indemnifies or protects against the risk of dying. Perhaps you would be surprised to know that barely one in six euros paid in life insurance premiums is to cover this eventuality.
In the face of the risk of dying, what is done is prevention (with insurance, possible negative consequences for our loved ones are prevented); and in the face of the risk of survival, what is exercised is foresight: it is saved for the future and, when that future arrives, those saved resources are used to maintain, and even increase, the standard of living. Thus, life insurance that helps to make this forecast is called savings insurance or chase saving account.
The risks of saving
If we decide to save for our retirement, is that saving risk-free? The truth is, no. In reality, this saver is subject to three major risks:
- Insufficient savings. The risk is that the money saved will not be enough.
- Lack of profitability. Since the money we save will spend a few years invested in giving returns, there is a risk that these investments, for many reasons, end up giving losses.
- Excessive longevity. Maybe we save thinking that we will need money to live X years after retiring but, luckily, we live longer, and the money runs out.
The first of the risks belongs exclusively to the saver himself, who decides what amount is appropriate to save at any given time. However, what about the other two risks? Well, what happens is that life insurance is the only product that is capable of covering both:
- Financial risk. The most common life insurance products on the Spanish market guarantee a minimum return in the long term. Some of those that have a special tax treatment, such as the Assured Pension Plans or PPAs, must guarantee by law at least the conservation of the capital saved. This means that whoever buys a PPA three decades before retiring will see it grow for 30 years, knowing that in no case can it make a loss.
- Longevity risk. In the mutualization, all the insured are treated as a whole, in a manner and form that derives for them a probability of survival. If that probability is well calculated, in reality, the personal destinies already do not matter: if a client survives longer than expected, that will be because another, unfortunately, will do so to a lesser extent. Both compensate each other, and this compensation is what allows life insurance to guarantee a life annuity, that is, return to the saver what he saved in the form of periodic payments that will not be extinguished while he lives.
Life insurance is capable of guaranteeing a life annuity to enjoy in retirement.
The fact that life insurance frees the saver from these two risks makes it the closest thing that can be found to a retirement pension. In fact, it has one more added value; in addition to savings, it can also cover death. With a single premium and a single contract, the client anticipates his retirement but also anticipates the circumstance of premature death, thereby generating a payment in favor of the people related to him (spouse, descendants).