They are important in financial planning, and their differences make them complementary
The Americans have increasingly understood the different products aimed at financial planning and its purposes, but there is still some confusion, for example, in the case of individual life insurance and private pension. Both are often seen as products that compete for the same space in financial planning, but in reality, they should be seen as complementary tools.
Both life insurance and private pension plans look to the long term, however, the similarities end there. Each has specific functions and benefits. The pension products aim at retirement, allow the choice between progressive or regressive tax regimes, and the reduction of the tax base by up to 12% – when the Income Tax (IR) is declared in full and contributions are made in the PGBL.
In addition, they use specially constituted investment funds, which do not incur quota-sharing, a semiannual collection of income tax expected in most conventional investment funds and which reduces profitability in the long run.
Individual life insurance, even the so-called redeemable ones, aims to protect the financial condition of the beneficiaries in the event of the insured’s early and unexpected absence, or the financial condition of the client himself, in situations that can transform his life, such as disability accident, serious illness, and even hospital admissions. Therefore, they are not and should not be confused with investment or social security.
Because of these characteristics, many experts recommend that people consider life insurance, pension plans, and investments as complementary products in their financial planning. Investment funds, therefore, are aimed at accumulating equity; private pension aims at a more comfortable retirement; Life insurance, in turn, is essential for succession purposes or to help the insured himself and his family to deal with possible problems along the way, such as early absences, serious illnesses, hospitalizations, or disability.
The amount accumulated in the funds of the pension products, through the contributions made and the profitability earned, will define retirement income, with no guarantee of value.
The indemnity of life insurance does not depend on the amount of installments paid or profitability, since, immediately after the policy is issued, protection considers the full amount contracted.
For example, even if the customer has only paid a portion of the insurance contract when a claim occurs, the beneficiary may receive the full amount contracted. That is, the product does not depend on accumulation and, after the first payment, the insured is already covered.
How does redeemable insurance work?
The redeemable insurance has a specific characteristic: it allows the insured to redeem an amount when necessary. However, when requesting the receipt of part of this amount, the protection amount is reduced, and, in cases where the entire available amount is accessed, the policy is automatically canceled.
This particularity of redeemable life insurance aims to give more flexibility to the insured, and should not be confused with the return of installments paid, profitability, or financial gains.
When hiring life insurance, it is important to provide all the health information requested in a complete and correct manner, in addition to carefully reading the general, special conditions, and terms of the policy to know the situations covered.
insurance or pension
A benefit for succession planning found in pension plans and life insurance is the fact that the death indemnity is exempt from income tax and the possibility to choose beneficiaries other than the legal heirs.
However, an exclusive benefit of life insurance is that it is not considered an inheritance; therefore, it is not subject to the Tax on Transmission Cause Mortis and Donation, called by many an inheritance tax. As the inventory process involves costs for the heirs, and, in many cases, can consume 15% to 20% of the total amount involved, it is normal to take out life insurance to cover these expenses and ensure the financial stability of the family during its resolution.