Explanation of insurance

Weird question for a notary public?

Well no, it's not. In fact, the majority of mortgages have a life insurance product attached to them, usually in the form of a mixed insurance policy. Such insurance, hence the name, actually consists of two parts, a capital insurance and a life insurance.

The capital insurance ("savings portion") is to ensure that at the end of the mortgage term - usually thirty years - an amount is paid out with which all or part of the mortgage debt can be repaid. But if the insured dies before the end of the term, and thus not enough has been saved, money must also be put on the table for repayment. That is what the term life insurance ("risk portion") is for, for which a premium is also paid, depending on the age, sex and health of the insured.

Two elements are important with regard to death benefit insurance, who owes the premium, and who is the beneficiary ("who gets the money").

I. No inheritance tax due to premium splitting

The Inheritance Tax Act provides that a payment from a term life insurance policy counts as an inheritance, so the beneficiary must pay inheritance tax.

This levy can be avoided if the following conditions are met:

a. premium liability.

A split must be made between the premium for the savings portion and the risk portion of the insurance, establishing that the beneficiary owes the premium to the insurance company for the death benefit. Partners thus in effect mutually ("cross") insure each other's lives. The premium split must be evident from the policy or from a clause sheet accompanying the policy.

To remain outside the tax, it is sufficient that the policy stipulates the cross-payment: the premium may therefore be debited from an and/or account.

b. cohabitation contract or marriage/partnership agreement.

The life insurance premium must not only be payable by the beneficiary, but also remain for the beneficiary's account.

Mortality insurance premiums must not be included in the joint household expenses or paid at the expense of a community of property, because then the other partner pays into it and the payment is taxed.

The premium splitting or cross-linking must be supported by what is stipulated in the prenuptial or partnership agreement or in the cohabitation contract regarding premiums of the life insurance.

Premium splitting can only be applied when there are separate assets, i.e., not in the case of spouses married in full community of property (but spouses fortunately have a large exemption and low inheritance tax rate). With cohabitants and spouses married on prenuptial agreements, things go well, at least if the cohabitation agreement or prenuptial agreement is worded correctly. Because this is particularly the case with older prenuptial agreements or cohabitation contracts, there is no harm in having them checked again by the notary on this point.

c. splitting premiums

The premium must be properly split by the insurance company.

The split premium amounts must actually be charged to both premium payers. This may be deviated from if, when applying for insurance, the premium payers declare that they agree to the insurer turning to the (first) policyholder for collection.

After each amendment of the insurance contract, this declaration must be made again.

d. time of assessment

The time of death is decisive in assessing whether the premium was actually borne by the beneficiary; therefore, should the other partner have accidentally contributed to the premium, this can still be corrected during life.

Example

Harro and Anne-Marie have just started living together (unmarried) in their proud possession, a house worth €250,000, burdened with a mortgage debt of €260,000. They have named each other as heirs by will (cohabitants do not automatically inherit from each other), and on each other's lives a life insurance policy has been taken out up to an amount of €160,000.00, leaving the surviving spouse with a debt of €100,000.00.

When Harro dies, and the insurance pays out, Anne-Marie has to deal with the Inheritance Tax Act. Although an insurance payment is in fact separate from the inheritance, article 13 (that number can hardly be a coincidence!) stipulates that a death benefit is considered an inheritance, and is therefore taxed with inheritance tax on the transferee, unless the deceased paid nothing on the premium. Since Anne-Marie, having only lived together for a short time, must pay at least 30% inheritance tax, the use of that "unless" in Article 13 is very important.

Because Harro and Anne-Marie each have their own assets (no community of property), it is possible to take out the term life insurance on each other's lives.

Harro insures Anne-Marie's life and owes the death risk premium on her life, and Anne-Marie arranges the same with respect to Harro. This premium splitting ("cross-insurance") results in the benefit remaining untaxed, thus saving many tens of thousands of dollars in this example.

II. Arrange benefits properly

1. Partner construction applied?

If one of the partners dies, it is the bank's intention that the insurance benefit be used to repay (part of) the mortgage debt to the bank.

Generally, the rights from the insurance policy are pledged to the bank (this is done through a "deed of pledge"), which, among other things, gives the bank the right to designate itself as the primary beneficiary. If the bank makes use of this, the insurance payment goes directly to the bank and all or part of the mortgage debt is cancelled, from which all heirs (i.e., not only the surviving but also the children) benefit.

The alternative is that the money does get distributed to the surviving beneficiary. The bank will only accept this if the survivor has given written instructions to the insurance company to pass on the money due to him/her to the bank. This written order is also referred to as a "payment order" or "partner statement.

It is important to make a deliberate choice of one of the methods because the tax consequences differ but, more importantly, because the choice matters in terms of who gets the assets after the death of both partners.

To immediately clear up a common misunderstanding: the partner construction is not the same as a surviving will.

The partner construction prevents the children's inheritance shares (due to the cancellation of the mortgage debt) from increasing. A survivor's will can then be used to make the children's (larger or smaller) inheritance shares non-recoverable.

Example

Harro and Anne-Marie were married in full community of property, so the premium split is no longer relevant, and have a daughter Anne-Fleur.

The house is worth € 280,000 and nothing has been paid off on the mortgage debt of € 260,000. We act as if there are no further assets.

If one of you dies, the issue of beneficiary is important.

If the bank is beneficiary, the death benefit of € 160,000.00 goes directly to the bank so that only a debt of € 100,000.00 remains.

The inheritance is then half of € 180,000.00, or € 90,000.00, and Anne-Fleur's inheritance share (which she cannot claim with married parents, by the way) is thus € 45,000.00.

If the declaration of partnership is signed and, for example, Anne-Marie would die first, Harro would receive the entire distribution of € 160,000.00 and use the money to pay off part of the bank debt.

Since he also partially pays off a debt for the children, he replaces the bank as a creditor, so that the debt remained a total of € 260,000.00, namely € 100,000.00 to the bank and € 160,000.00 to Harro.

The inheritance is therefore now only half of € 20,000.00 or € 10,000.00, so that Anne-Fleur's inheritance share is only € 5,000.00. After all, the insurance payment was made "outside the estate", so Anne-Fleur does not benefit from it.

The partner construction is usually fiscally more favorable upon the death of the first partner than the method where the bank is the beneficiary.

This is because the surviving spouse has a large inheritance tax exemption of € 804,698 (rate 2025) and the children only a relatively small one of € 25,490 (rate 2025).

The downside, again, is that the inheritance of the surviving spouse will be larger in due course, which may cancel out the initial savings achieved later (if the surviving spouse has time to live, assets can of course be gifted to the children).

In any case, the application of the partner construction at the first death results in a liquidity advantage (the survivor pays no or much less tax at that time).

That the money ends up with the surviving partner and not (also) with the children is not so bad if the surviving partner is the children's other parent; then the assets accumulated by father and mother will eventually end up with them anyway.

However, would, in our example, Anne-Fleur have been born from a previous relationship of Anne-Marie then she is not an heiress of Harro. Thus, she will probably never see any of the benefit!

So with children from previous/different relationships, the partner construction is not always best!

2. Benefit check!

Apart from the question whether the partner construction has been applied, it often turns out that it is not an unnecessary luxury to check whether the beneficiary in the life insurance policy corresponds to the inheritance wishes of the policyholder. For example, it frequently happens that the children, or even an ex-partner, are listed as the first beneficiary in the policy.

Especially if a will deviates from the standard legal inheritance (e.g., disinheriting a child), it is important that the policy also be adjusted.

III. How to proceed. Make a calculation!

After reading the above, it will be clear to you that it is important to pay attention to your life insurance policy or policies.

We cannot advise you on this without a thorough analysis of your personal and financial position. On the basis of such an analysis, an initially signed partner declaration can be withdrawn, or a partner declaration can still be signed.

Kooijman Autar Notaries can perform such an analysis for you; the costs of this advice will be charged to you on the basis of the time spent on it.