When a life insurance policy is paid out, the question sometimes arises as to what is best to do with the money. The type of payout also plays a role.
The payout of a life insurance policy can represent a considerable sum. In 2023 alone, the industry paid out almost 97 billion euros to its customers. In order to make the best use of the money, however, you should proceed carefully. This starts with the way in which you have your life insurance paid out. We show you what options you have and what makes sense for whom.
With life insurance, there are usually two ways in which you can get the benefit paid out:
- in one go as a one-off payment
- as a monthly pension.
This is called the capital option. Which payout option is more suitable for you depends, of course, on your financial situation and your wishes. If you can really use a large sum right now, a one-off payout is better than a monthly pension. You can use the paid-out life insurance for the following, for example:
If you have accumulated a lot of debt and it may even be urgent to pay it off, a one-off payment is a good idea. This is even more true if the loans have high interest rates. Then you often save more interest by paying off the debt quickly than you could earn by investing money. It’s also just a good feeling to finally be debt-free.
If there are no loans to pay off or if there is even money left over after paying them off, you could use it to top up your emergency reserves or perhaps build them up in the first place. Experts recommend having an emergency fund of three to six months’ salary in reserve. This gives you financial security for unexpected expenses or loss of income. Read more about this here.
If you own a house or an apartment, it can make sense to invest the money from your life insurance in value-enhancing renovations or energy-saving renovations. This will save you money in the long term and increase the value of your property. There are now various specialised providers who can help you find the right measures (more on this here).
It may not be you who needs a large sum of money, but someone in your family who you want to support. For example, the sum from the life insurance could increase your child’s equity to buy a house, or you could invest it in your granddaughter’s education. Or perhaps you yourself have the desire to further your education.
It is perfectly legitimate to use the lump sum payment for something you have been waiting for for a long time. This could be a longer trip, your own motorhome or expensive equipment for your hobby. If your finances are otherwise in good shape, there is absolutely nothing wrong with treating yourself to something now and then.
You don’t necessarily have to opt for monthly pension payments if you want to secure your standard of living in old age. You can also use the money from the insurance to invest it in the capital market and pay it out to yourself later, including the returns. A monthly pension built by yourself, so to speak.
This is possible, for example, with an ETF savings plan. ETFs are exchange-traded index funds that replicate an index such as the DAX. They therefore always develop almost exactly like the index they replicate. For your retirement provision, however, you should invest in a much broader index than the DAX. The MSCI World is recommended. It includes more than 1,500 shares from companies in the industrialized world, so you spread the risk across many different shoulders. Read here why ETFs still make sense in old age.
The advantage of this self-built stock pension: On average, you will achieve a higher return than if you leave the same money with the life insurer so that it pays you a monthly pension. Insurance companies generally invest a little more conservatively. Read here how to set up an ETF savings plan.
If you can already see that your statutory pension will be rather meager and you have not made sufficient company or private provisions, you should opt for a secure pension payment. This guarantees you regular payments until the end of your life. The following applies: the longer you live, the higher the total amount paid out. This could even result in a larger total benefit than with a lump sum payment.
